Angels and venture capitalists will not sign non-disclosure (confidentiality) agreements just to listen to an entrepreneur’s funding presentation, or even to read the entrepreneur’s business plan. Serial entrepreneurs understand this and write their plans without describing the “secret sauce.” Investors will eventually want to validate the intellectual property (IP) prior to investing, but not just to hear about the opportunity.
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It seems that everyone is writing about best practices these days, and I certainly agree they should be followed whenever possible. There has been a disturbing lack of guidance on one of the most common activities of early stage companies: throwing money out the window. So, I’m here to help.
One of the questions I hear most frequently is how to find consultants to help with developing a business plan for investors. Often it seems as if people are thinking that the right prose and formatting could make the difference between investor interest or lack of it.
When entrepreneurs raise equity capital for startup companies, the investors’ percentage of ownership is determined by the negotiated valuation for the company at the time of investment. For example, if the negotiated pre-money valuation is $1.5 million and the investors provide $500,000 in equity investment, the investors are purchasing 25% of the company [$0.5 million ÷ ($1.5 million + $0.5
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The official start date for your startup is the date you incorporate the business. This is obviously important for tax purposes, but may also dramatically influence how potential investors, customers, and competitors look at you.
My rule of thumb expectation is that it should take two months to set up the legal entity, six months to finalize the business plan,
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The US Securities Exchange Act of 1934, section 12(g), generally limits a privately held company to fewer than 500 shareholders. The assumption has been that companies with 500 investors are quasi-public anyway, and for disclosure and other reasons should be forced to go public when the shareholder number approaches this limit.
Entrepreneurs: if you’re looking seriously at angel investment, and you have the kind of product-market fit and management experience investors will like, you need to take a good look at convertible notes.
Do yourself and the investors you want to talk to a favor: take a few minutes and do some homework on this issue.
The dictionary definition of a mentor is “an experienced and trusted advisor,” or “leader, tutor or coach.” The definition of a critic sounds similar, “a person who offers reasoned judgment or analysis.” The big difference, of course, is that a mentor looks ahead to help you, while a critic looks backward to tell you what you did wrong.
In the “good old days,” angels invested in seed-stage startups and teed up promising companies for subsequent venture capital financing. If the company was successful, this quickly led to an IPO – a very happy ending for the entrepreneur, the angels, and the venture capitalists. My, my…how the world has changed.
One of my pet peeves in pitches is the triple whammy of absurdly high profitability projections. I’ve seen entrepreneurs promising 30, 40, even 50 percent profitability in their projections.
Why triple whammy? Projecting excess profits, at rates way beyond the normal, are bad for at least three reasons: