cloud network hunting note: first-time entrepreneurs often ambitious, often frustrated because of the inadequate experience. Seed funding is a key link in the process of start the new life, founder should formulate investment terms, determine the value, distinguish to stocks and convertible bonds and choose the right financing way. Know more details, please see Andrej Kiska guide investment terms.
in the past five years, the seed investment to shine. North American seed investment proportion of the total number of gold wind investment growth from 33% in 2008 to 67% today.
central and eastern Europe are also encouraging performance: according to the European private equity and venture capital association, according to the current number of seed investment increased by 19 times than in the past four years. Although many investment has not announced or not venture capital association members, so the association did not cover all of the data, but it can still prove my point of view.
the increase of seed money naturally led to the increase of various kinds of early startup investment terms. For founder for the first time, most of the terms and conditions (especially the central eastern Europe) are meet for the first time.
if you want to know more, just to see me this article investment terms guide. It will be for the European to sail the navigation of the founder of the financing process.
what is the investment term sheet ( handle yourself )?
investment terms list is involved in the investment behavior of loose collection. It is usually only two restrictions: exclusive and confidentiality.
the confidentiality restrictions enterprises and investors share the amount of information. Once you have signed an inventory investment terms, you will not be able to discuss investment and any didn’t sign the outsider.
investment terms in will take effect only after signing (exclusive), even before the signing of founder terms information should also be treated with caution, it is very important. If you are seeking more money will terms to other investors, and that the one who will be with you signed terms very unhappy.
exclusive can prevent enterprises for a period of time, and other investors. It like confidentiality, to ensure that the enterprise a person cannot be signed by the investment terms as a negotiation tool, to attract more investors or better investment.
if not completed within specific time investment, enterprise can discuss with other investors.
why focusing too much on valuation will ruin your startup?
value is very important, but I think many people (especially first-time entrepreneurs) have overestimated the importance of it, this will give the company a lot of risk.
the first, the amount of investment you didn’t get what you expect. Accept overvalued can get short-term investment profit, but costs a long term.
will only play “appraisal” investment equals suggests it cannot create more value. Select the correct trusted partner can really promote the prosperity and development of the company; Even if it is down this year’s valuation, but in the long run for the company to create more value. I have witnessed many startups to decay due to choose the wrong investors.
the second, the high valuation seed refinancing will be later made huge barriers. If you want to raise the seed money for 300 million euros, and look forward to A round of investment valuation is 3 to 4 times that of seed funding to attract investors. But you know how many companies are central eastern Europe will take A round of investment valuation is raised to 1 billion euros or more? Very few. Most companies is similar to your proposed valuation, so high valuation of seed funding is not good.
if you have A round of funding at the company’s valuation of 500 million euros, so is more likely to raise more money, you will not be willing to do so? This number just to illustrate, of course, but despite this I still deeply believe that if not in early excessively pursuing high valuation, you’re more likely to invest in the next rounds (that is, to find the right product or market) in to raise funds.
the third, and most important, is structural: the more you focus on valuation, the more investors will be to increase investment strict clause in the contract to withstand adverse factors. Look at me from Jamie McGurk borrowed the row picture, it can illustrate my point of view.
to distinguish between two of the most common way of investment is very important, they are: the convertible bonds with direct investment (also called shares investment, property investment).
in direct investment, entrepreneurial companies with shares in return for investors’ cash. This easy to understand. In a convertible bond investment, investors will have a due date loan, interest and special conversion rights: the company shares to repay loans to investors in a future time.
in general, the convertible bond is not very common, but the investment process is usually only need a small amount of investment terms.
the definition of convertible bonds
a convertible bond can be converted into equity, short-term debt is usually the next round of investment when converted into equity. Seeds, for example: if your investment is convertible bonds, it will be converted to equity when you raise A round of investment.
before the entrepreneur’s advantage lies in the transformation of convertible bonds is like standard loan: investors usually don’t have much priority right of shareholders (e.g., liquidation preference, etc.) on the board of directors.
because the file of convertible bonds is very short, execution is soon (this is why the convertible bonds faster than direct investment, usually only a few weeks to complete). In addition, the standard of convertible bonds do not need to pay interest immediately. On the contrary, it will be accumulated debt and translated into equity, I’ll explain in detail below.
the disadvantage is the essence of loan: loan until converted into equity, investors can obtain the priority of assets (such as the majority of the company’s cash and hardware) in order to get the company to repay the loan and interest.
it goes without saying that most startups don’t have enough cash to repay the loan at the date of maturity, so have to clear all assets are closed.
why use and when to use convertible bonds
there are several kinds of the situation can accept convertible bond investment. First, it can serve as expected in a big way of financing before the origin of “transitional financing”.
if you raise the seed financing round of euro 200000, are now raise 200 million euros A round of investment and A few months to complete. You can accept 100000 euros before completion of convertible bonds as a financing buffer.
tell from the legal process, because of the convertible bonds perform faster, the entire financing process can be done in a few weeks.
in spite of this, this kind of bridging finance can sometimes be tricky: if investors are not absolutely sure everything goes well, resorting to quick convertible bonds may lead to concern about company performance and the development prospect of (that is, “why need more cash to finance organization?” The problem). Lose the confidence of investors existing harmful for financing.
second, when investors and entrepreneurs cannot agree on valuation, especially when they have struck a conversion discount but not sure valuation highs (explained below) can be accept convertible bonds. I don’t like this kind of situation: the two sides are not face to face with problems, but to transfer the problem to solve again sometime in the future.
this strategy often backfire, investors and entrepreneurs will happen unpleasant dispute, it will block the future financing and destroy a startup.
convertible bonds are increasingly applied in the seed stage of the company. Numerous complaints from vc firms try this, especially when it is excessive use or investment terms are too harsh.
of convertible bond investment terms
maturity date : this is the time of loan expires.
the first thing to understand is that investors can be required to repay the loan at the date of maturity. This is to protect itself from loss: if the company run badly, investors can recoup their investment at the date of maturity and interest (if the company didn’t have enough money to loan, investors can destroy company).
: interest rates for loans to pay interest. It is usually a payment-in-kind notes (payment) of physical interest, that is to say, the company didn’t really pay cash, but pay along with the interest of loan capital accumulation rise. In this case, the total interest and loan funds into the stock together.
case: if you raise a 100000 euro convertible bonds, the interest rate is 8%, 12 months into shares, the number of actual changes is 108000 euros. The most common interest rate is 6% to 8%.
: describe the important terms of loans into stock condition. The most typical casting condition is based on qualifications of “financing” : that is, how much once the company financing how many euros (that is, the qualifications of “financing” amount of funds raised) above, the loan will be automatically converted into shares.
a convertible bond is one of the most popular with investors can choose any time into loans, but if startups start prior to the expiration date to other financing, the investor will not be able to choose the time. Generally speaking, if a startup is not before the due date for the new financing, the investor has the right to decide whether to convert to equity.
: startups to make loans to automatically convert to equity and the minimum amount for the new round of funding. If the quantity according to the company for seed funding, A round or rounds of financing and large fluctuations.
discount : compared with the new investors, existing investors in the loan into equity often in valuation discount to compensate for the early into the company and the additional risk.
case: if the new investors to the company appraisal 5 million euros, if terms indicate a valuation discount of 20%, the number of loans into stock is 5 million * 80%=4 million. Usually can convert the loan standard discount between 10% and 30%, 20% is the most common.
valuation caps : in addition to the discount, investors can also set the estimate, the conversion loan can be one of the biggest valuations.
the above cases involving high estimate of 3.5 million euros. If it does not have high estimate, investors will be 4 million euro loans into stock valuation, but with the high estimate, he can only convert 3.5 million euros.
the above enterprises are the most commonly used when dealing with convertible loan terms, at least in our Credo of vc company experience is as follows.
although perform rapid terms of convertible bonds, but we still prefer stock investment, investors and business people do not need to hide or escape clause or valuation, agreed at the outset of the entire investment structure, so you can concentrate on what the most important thing: to create value for the company.