Startup Boards — 3X in 3 Term Sheet Walkthrough The TEN Capital Early Exit term sheet includes a 3X redemption right, giving the investor the sole discretion over their right to 3X their investment at the three-year mark from the date of the investment.  A redemption right gives the investor…

Startup Boards — How to Perform Diligence in a Group In performing due diligence in a group of investors, it helps to assign roles and responsibilities. There are three phases to diligence: 1. Documentation diligence 2. Team diligence 3. Domain diligence The lead investor should take the three steps and…

Startup Boards — Know Your Why For startup investing, it’s important to know why you are investing beyond the monetary gain.  There’s an old saying among angel investors: “Angel investors want to make a little money, do a little good, and have a little fun.”   Successful investors, I know, not…

Startup Boards — Building Your Entrepreneur Ecosystem I have found a number of investors want to build their entrepreneurial community as part of their investment thesis.   The most common lament from a startup investor is, ‘I invested my available funds and must wait ’til I see something return before investing…

Startup Boards — Early Exit FAQ It’s easy to get into a startup investment, but it can be hard to get out.  An Early Exit deal structure gives the investor a way out. The TEN structure uses redemption rights. What is a Redemption Right, and how does it work? A…

Startup Boards — Why Use an Early Exit Deal Structure In startup funding, 65% of the investments after three years are still in business but are no longer on the venture track.  In most cases, they are growing businesses but are not going to be bought out for a significant…

Startup Boards — Early Exit Deal Structure Investing in startups is risky. One way to reduce the risk is to define the exit.  TEN Capital’s Early Exit term sheet is a convertible note with a 3X in 3-year redemption right at ‘investor sole discretion’ to provide the investor an option…

Startup Boards — Diligence Process – Team Before investing in a startup, it’s important to review the diligence documents, so you understand the business.  There are three phases to diligence: 1. Documentation diligence 2. Team diligence 3. Domain diligence Domain diligence is an important part.  Check the industry to see…

Startup Boards — Diligence Process – Team Before investing in a startup, it’s important to review the diligence documents, so you understand the business.  There are three phases to diligence: 1. Documentation diligence 2. Team diligence 3. Domain diligence Team diligence is the most critical part.   Gather references for the…

Startup Boards — Diligence Process – Documentation Before investing in a startup, it’s important to review the diligence documents, so you understand the business.  There are three phases to diligence: 1. Documentation diligence 2. Team diligence 3. Domain diligence For Documentation diligence, ask the startup for a list of key…

Startup Boards — Diligence Process For startup investing, it’s important to have a diligence process. In most cases, you’ll sign a term sheet with funding contingent on passing due diligence. It helps to tell the company about your diligence process, such as what documents are required, what steps you perform,…

Startup Boards — Allocate Funds In preparing for Startup investing, you should determine up front how much you are going to invest.  In general, it’s best to keep your startup investing to 3-5% of your discretionary investment funds.   These are funds you can lose and not impact your lifestyle or…

Startup Boards — Deal Flow Sources For finding startups to invest in, set up a number of sources that fit your investment thesis. Track each deal that fits your requirements.   In general, you should spend some time networking with startups and investors to stay connected. Use your network of contacts…

Startup Boards — Investment Thesis In startup investing, you should have an investment thesis, which is what you invest in and why it will be successful. Here’s how you build your investment thesis if you haven’t done so already: Step one Look at 50 deals and write down what you…

How to Find Deal Flow In running an angel group, you’ll need to set up deal-flow sources to provide quality deals to the members. Here are some sources to consider: Ping the members of the group regularly for deals they recommend. Avoid the ones in which they say, “I’m not…

How to Recruit Members In running an angel group, it’s important to recruit new members. The first step is to showcase the deals you have to prospective investors to see if they find them interesting. You can send them recently-funded deals so the prospective investor can see the types of…

Branding for Your Group In running an angel network, it’s important to establish a brand for the group and promote it. A brand makes your group look bigger.   There are many funding sources in the market, and a brand helps your group stand out from the crowd. A brand helps…

Portfolio Analysis In running an angel network, it’s important to provide ongoing portfolio analysis for the members. Investors want to know how their current investments are doing. They also need to keep track of their current investments by sector and stage to allocate the remaining funds appropriately. In selecting the…

Best Practices for Running an Angel Network For running an angel group, here are some best practices to consider: 1. Build processes and programs. The second time you say something put it into an email template, a procedure document, or a website and make it a part of your program….

Fundraising Challenge for a Benefit Corp  There are many challenges in fundraising for a benefit corp. Here is a list of challenges: Because your company must demonstrate a public benefit, you must first set up a business that provides the benefit and can show the measured result. Many social impact…

How Angel Investors Engage Impact Investing Angel investors fill the gap between family-and-friends funding and institutional funding. They engage with impact startups in several ways: They fund startups with early-stage capital to launch the business.  They provide mentorship to the startup founders to help the company. Some angels work as…

What Is a Benefits Corporation? A Benefits Corporation is a legal entity that is set up to provide a public benefit. The company using this entity must commit to producing a public benefit. The board of directors must consider the consequences of its decisions on the community. The company must…

Impact Investment Thesis An investment thesis states what you will invest in, why it will be successful, and what outcome you anticipate.  It’s important to determine your investment thesis for impact investing. Here are some guidelines: Impact investing proposes to invest in innovative companies that seek to change the world….

What Is Esg? ESG stands for environmental, social, and governance, and represents the area of focus for socially responsible investors.  This is often referred to as sustainable investing. ESG investing incorporates environmental, social, and governance factors as it relates to the mission of the business.  It’s a set of standards…

17 Sustainable Development Goals Impact investing focuses on social and environmental causes. The United Nations provides 17 sustainable development goals which serve as the basis for impact investing as follows: 1. No poverty 2. Zero hunger 3. Good health and well-being 4. Quality education 5. Gender equality 6. Clean water…

Investor Motivations for Impact Investing Investors fund impact startups. Here’s a list of the primary reasons: The startup furthers social and environmental causes that align with the investor. Investors want to see their investment do more than just generate a return. The startup shows strong growth potential and targets a…

Indicators of a Successful Impact Investment Impact investing seeks to fund startups with social or environmental benefits. Those running impact companies must do so with the intention of providing a social or environmental impact with a measured result. The investment must provide a benefit that is more than what would…

How to Measure Impact Impact startups provide not only a product or service but also a social or environmental impact. Impact startups need to know how to measure their impact in addition to their financial return. Here are some ways to measure it: The startup could measure the impact for…

How to Find Impact Investors Impact investing continues to expand in scope. It covers many industries, including clean energy, food, education, healthcare, housing, clean water, and more. For startups looking for impact investors, here are some key steps: Determine your area of impact. This is important as many investors focus…

Startup Boards — Using Donor-Advised Funds for Impact Investing Donor-Advised Funds (DAF) are funds you set up with your brokerage firm to make tax-deductible contributions to foundations and non-profit organizations you want to support.   You receive the tax deduction when you transfer money into your Donor-Advised Fund.  The funds continue…

Startup Boards — Impact Measurements Impact is in the eye of the beholder.  What impact you see, may not be shared with the investor or company you are working with. You must measure your impact. There are several systems you can use, such as: GIIRS — stands for Global Impact…

Startup Boards —  Primary vs. Secondary Impact Investing In impact investing, there is primary impact and secondary impact. Primary impact comes from the company pursuing its mission.   You measure it based on the effect the business has on the cause it supports. For example, how many students improved their scores….

The Challenge of Impact Investing Impact investing seeks to make the world a better place through its investments. As with all investing, it comes with its own challenges. Most impact investments underperform the market.  The focus on providing social or environmental benefits degrades the financial return. Some researchers claim that…

Startup Boards — Impact Metrics In raising funding, you need to show your metrics.   Startups in the impact space should also show their impact metrics, as investors will look for your results there.  A common mistake by impact companies is to focus on the size of the market to be…

Key Terms in Impact Investing There are key terms used in the impact investing world.   Here is a list of the ones to know: 1. Below market rate — an impact investment made with the expectation that the financial return will be less than the market rate of a startup’s…

What Is Impact Investing? Impact investing is an investment in startups that can generate a social or environmental impact in addition to a financial return.   It can be done anywhere and at any stage of business. Impact investing includes not only angel investors, but also family offices, pension funds, wealth…

Venture Fund Defaults  In a market recession, it’s often the case that limited partners – called LPs – are unable to fulfill their capital commitments to venture funds.  For venture funds encountering this issue, the first step is to open a dialog with the LPs about the capital needs and…

Payback Period for the Product Investors look for strong margins on a startup’s product as it’s a positive indicator of customer interest and a profitable business.  One way to metric this is the payback period for your product.  It’s the amount of time it takes for a customer to repay…

How to Improve Your Valuation Valuation is a negotiation and not just a formula. Here are some key points to improve your valuation: Highlight the team and their contributions to the business. The team is often no more than one slide in the deck and rarely does their value come…

Using Metrics in Your Valuation Metrics can help drive the valuation for your startup fundraise. Here is a list of key metrics to include: Number of visitors to your website and their conversion to paying customers. The higher the conversion rate, the lower the cost of sales and the greater…

Maximizing Your Valuation Valuation is a negotiation and not a formula. While there are formulas and rules of thumb to help determine valuation, it comes down to positioning and negotiating. Here are some key points to maximize your valuation: Emphasize the team and show what they are doing to help…

Justifying a Startup Valuation Startup valuations differ from standard valuations in that they don’t solely rely on expected cash flows, book value, or other tangible aspects of the business. Intangibles such as quality of the team, intellectual property, product status, and customers are the driving factors. Most angel investors want…

Calculating Forward Multiples Valuations for software companies with recurring revenue are calculated using forward revenue multiples. While revenue is the primary factor in calculating the multiple, some companies can increase it by demonstrating excellence in other areas. Use these definitions to calculate it: Revenue growth – revenue this year over…

5X Rule of Post Money-Valuation As an investor reviewing deals, you’ll hear a wide range of startups with various fundraises and pre-money valuations.   So, how can you screen the deals to find those who have ‘reasonable’ valuations? Try the 5X rule. The 5X rule says to take the post-money valuation…

How to Make Your Data Valuable Startups can make their business more valuable if they collect data and turn it into a revenue-generating product. Many startups providing a service can collect data about the process, the customer, the market, and more. Raw data is not of value. It must be…

Startup Valuation Roadmaps Investors setting a valuation should review the cap table to understand how future rounds will cause dilution. A cap table tracks each shareholder and the amount of equity they own including the pre and post-money valuations. Key factors to consider are the following: Option pools — what…

How to Negotiate Valuation With a Startup The key to negotiating the valuation for a startup is to find and examine each value that is already in the business, as well as each value that must be built to achieve a successful exit. Start with the team and check to…

Minimum Information an Investor Should Receive After closing an investment round, the startup should set up a monthly report to the investors. Here’s a list of information to send an investor: Customer wins — list out key sales successes. Celebrate every win. Key metrics — show the core 1-3 metrics…

Investor, Advisor, Mentor, Board There are four ways someone can help a startup outside of becoming an employee. You can be an investor, an advisor, a mentor, or a board member.  As an investor, you can fund the startup. As an advisor, you can guide the founder on strategy and…

What You Should Do After You Sign the Check An investor does a great deal of work before the investment is made and must also do work afterward. Here are some key points to consider: As an investor, you need to maintain contact with the startup. Make sure there’s control…

Nine Types of Angel Investors There are many types of angel investors. Here are nine types commonly seen in the startup community: 1. Networkers — they know a great number of people and can make introductions to them. They are helpful in finding more investors as well as team members…

Angel Investing Best Practices Continued Angel investing is fun but difficult especially if you want to make a return on your investment. Here are more best practices to keep in mind: Take ownership of your due diligence and don’t rely solely on others. Work with angel investors both within your…

Angel Investing Best Practices Angel investing is fun but difficult, especially if you want to make a return on your investment. Here are some best practices to keep in mind: Treat entrepreneurs well because word travels fast in the startup community. No matter how hard you study, the real learning…

Know Your Why In funding startups, it’s important to know your why. This goes beyond making money, saving for retirement, and financial goals.  What is your mission or cause that you are passionate about? Start with your passion and what drives you. Consider what impact your investment will have on…

Powerball vs. Moneyball There are two approaches to venture investing: Powerball and Moneyball. Powerball looks for startups that will be unicorns and pay outsized returns upon an exit. These are called home runs. Moneyball looks for startups that will return a decent amount to the investor but not outsized returns….

Evaluating the Startup’s Metrics In reviewing a startup, ask the founder or CEO for the metrics they use to guide the business. Check for these points in their metrics: 1. Do they have a key set of metrics? Many startups aren’t tracking anything. 2. Is the metric appropriate for their…

Beyond the Growth Story In raising funding it’s important to demonstrate the growth story — sales, team, product, and fundraise are in motion. These are the core four things investors look for to judge the startup’s traction and momentum. Here are additional proof points to highlight to the investor: 1….

Competitive Advantages In the pitch, investors look for the startup’s competitive advantage. “Me too” companies are more difficult to fund because they have few if any competitive advantages. A true competitive advantage increases your revenue by 30% or reduces your cost by the same amount. Here’s a short list of…

Drawbacks to Convertible Notes Convertible notes are often used by startups in the early stages of fundraising as they are fairly simple to use and need little legal work compared to equity agreements. There are drawbacks one should know.  Here’s a short list to consider: Convertible notes are not equity…

Build Your Community In funding startups, it’s important to build out your startup ecosystem. A stronger startup scene will bring better funding opportunities. Here are some key points for building your startup ecosystem: – The startup world goes through cycles every 3-5 years with new technologies, companies, and programs, so…

Testing the Serial Entrepreneur Entrepreneurs who have failed are often strong leaders in their next venture. To know if a serial entrepreneur is on track to success after their first failure, check these points: – Character — if they don’t have character, then nothing else will matter. – Passion —…

Roadmap Investing In funding startups, it’s important to look at not just the current product, but the roadmap overall. Some technology markets have a long, rich future ahead while other markets do not. Look for the technologies that have a broad future with a clear trajectory. Startups propose products to…

Best Practices for Startups Raising Funding Raising funding is difficult. Here are some best practices for startups raising their next round: Investors are busy, so organize your fundraise around their schedule, not yours. Focus on investors who fund your stage and type of startup. Provide updates about your business and…

How to Become an Accredited Investor To invest in startups directly, one must be an accredited investor.  The Securities and Exchange Commission sets the criteria for who is accredited. Here’s a list of those who meet the criteria: Individuals who have a net worth exceeding $1M. Individuals who have earned…

How Investors Can Help Their Companies In funding startups, it’s important to choose companies you can help.  If you only write a check and nothing more, then the investing experience will be minimal. It’s only a return and nothing more.  It’s best to choose startups that you can help by…

After You Write the Check After you write the check, it’s important to remain engaged. Here are some key steps to follow: Stay in touch with the CEO and keep up-to-date on their status. Track the progress of the company to determine if it’s worth a follow-on investment. Review the…

Asset Allocation In angel investing, it’s important to set aside funds for startup investments. In most cases, investors dedicate 5%-15% of their discretionary funds to angel investing. There are several issues with asset allocation for angel investing compared to publicly-traded stocks, bonds, and mutual funds. Startup investments are illiquid as…

State Tax Credits Many states offer tax credits for startup investments. Those states with a state income tax will reduce your capital gains tax burden. The typical requirements are as follows: 1. The business must be a C-Corp or an LLC entity. 2. The entity was organized no more than…

Stock Options Stock options are a key part of the compensation of employees. These are called Incentive Stock Options or ISOs. If you exercise and sell the shares immediately, the proceeds will be taxed at the ordinary tax rates for the difference between the exercise price and the fair market…

Gains and Losses There’s an old saying, it’s not how much you make, it’s how much you keep that counts.  Tax management is an important topic for angel investors.  There are specific laws that give tax breaks to investors for startup investments. The first is called Section 1244 which gives…

When to Follow On In most startup funding, there will be a need for additional rounds of funding. Here are some questions to ask before making that follow-on investment: 1. Does the team demonstrate integrity? 2. Do they have traction in the market yet? 3. Do they hit milestones and…

Apply Your Investment Thesis to a Startup Before investing in a startup, apply your investment thesis to it to see if it makes sense. Write out the company’s strategy and how it fits into the overall market.   Review their position relative to the competition. For the target company, look for…

Building Your Investment Thesis — View of the Future For investing in a startup, consider the future and what will be needed then. Don’t just look at the world as it is today.   It takes several years to build a business and what you see now will inevitably change. Map…

Invest Early-Stage or Late-Stage – What’s the Challenge? Venture capital has two choices in funding startups.  They can go for early-stage companies or late-stage companies. So, which stage to focus on? The risks are higher for early-stage companies, but the valuations are lower. Any meaningful acquisition typically leads to a…

Diligencing the Exit In diligencing the startup’s exit strategy, check the following: – Do they have a list of potential buyers? – What companies are on the list? – What milestones must be met to qualify for a buyout? – What price is the going rate for buyouts in this…

Diligencing the Use of Funds In diligencing the startup’s use of funds, check the following points: – How much is spent on compensation? – Is it appropriate for an early-stage company? – How much is spent on sales, and does it align with the company’s sales strategies? – How much…

Diligencing the Terms  In diligencing the startup’s term sheet, check the following points: Is the valuation or cap rate appropriate for the stage of the company?  If it’s out of line, then other terms such as liquidation preferences may be needed. What dilution will the investors go through, such as…

Diligencing the Legal Issues In diligencing the startup’s legal documents, ask the following questions: For the intellectual property, ask what was filed and when? Did they file a provisional patent or a utility patent? It takes three years from the date of filing for the patent to be approved, so…

Diligencing the Team for Skills In diligencing the team, here are some key areas to check: Sales skills — the CEO and others must be able to sell their product or service.   In the early stages of a startup, there won’t be a dedicated sales force, and everyone on the…

Diligencing the Financials In diligencing the startup’s financials, ask the following questions: What is the key assumption behind the financials? Does it assume a product will reach the market at a specific time? Does it assume we’ll have hired new team members by a certain date? What funding does the…

Diligencing the Customers in the Market In diligencing the customers in the market, check for the following: 1. Who is the target customer?   2. What is the ideal customer profile? 3. What is the customer acquisition strategy and cost? 4. Do they have a standard process for acquiring customers? 5….

Diligencing the Competition In diligencing the competition, check to see how well the startup knows its competitors.   Do they know what the competitors offer, how they price it, and what their advantage is over that competitor? Even if the startup tells you there’s no competition, rest assured there is. Sometimes…

Diligencing the Demand In diligencing the demand for a startup’s product, here are some key points to check: Is the product a nice to have or a must-have? For customers buying the product, assess their budgets. Do they have deep pockets, or do they have average pockets? Assess their place…

Diligencing the Technology In diligencing the technology in a startup, here are some key questions to ask: How many of the tech modules have been completed and how many more must be completed before going to market? Does the technology provide a substantial advantage over the competition? One way to…

Diligencing the Team In diligencing a startup for investment, the team is one of the most critical factors and the one that is most often overlooked by investors. I see investors focus on the product, the market, and the competition and ignore the team assuming every skill is at the…

Sizing the Market In diligencing the market, look for a market that is large and has strong growth potential. If a new technology has spurred the growth of the market, then this may be a good time to invest. Markets that are behind on the latest technology are ripe for…

The A Team With the B Plan In funding startups, look for the A team working on the B plan. In this situation, the team can clearly accomplish the task at hand because they’ve done it before and the task is not that hard. The opposite of this is the…

Financial Analysis In diligencing a startup, analyze the financial statements to understand the business better. Here are key items to check: – Where does the revenue come from? – What could stop or halt the revenue? – How far is the company from profitability? – How much cash is on…

Business Model Analysis The business model shows where the company incurs costs in order to generate revenue.  In diligencing a startup, spend some time analyzing the business model to determine how robust and profitable it is. Check the revenue to see how much is recurring, repeating, or one-off. The more…

Due Diligence Mistakes There are several mistakes one can make in the due diligence process. Here are a few points to check: Focusing on every potential risk in the deal and not the primary risks. In this case, diligence turns into a never-ending slog with no endpoint. Many CEOs are…

The Risks in the Deal In diligencing a startup, focus on the key risks. Here’s a short list to review: The team — do they have the skills and will they remain committed to the company? The market — will the market continue to grow? The competition — will there…

Risks and Assumptions In diligencing a startup, it’s important to articulate the risks and the assumptions you have about the startup. Start by identifying the risks in the deal. The team, product, market, technology, and competition are key sources of risk.  List out each one and what risks the company…

Key Factors in Diligence There are several factors to achieve success in running a due diligence process. First, dedicate at least 20 hours to due diligence.   Many investors dedicate less than 20 minutes. Share your diligence findings with other investor groups in return for their findings. Apply your skills and…

Form C Disclosures for Crowdfunding Equity crowdfunding is a regulated fundraise by FINRA, the Financial Industry Regulatory Authority. A company can raise up to $5M on equity crowdfunding. Anyone can invest. Those who are not accredited investors are limited to $2,200 per year per company. Those raising funding must file…

What Is Reg CF Crowdfunding? Reg CF refers to the SEC regulation for equity crowdfunding. This form of crowdfunding offers the investor an equity stake in the company. By contrast, rewards platforms provide the product to those who provide funding. In equity crowdfunding, the investor must hold the stock for…

How Equity Crowdfunding Is Different From Traditional Fundraises Equity crowdfunding is different from traditional fundraises. Here is a list of differences to consider: Traditional fundraises expose your company to accredited investors which is a much smaller group. Equity crowdfunding exposes your company to the general public which brings greater branding…

Legal Issues in Equity Crowdfunding There are specific legal issues regarding equity crowdfunding campaigns. Here’s a list to keep in mind: The regulations for fundraising are as follows: Reg CF — SEC designation for an equity crowdfunding raise that lets anyone invest in a startup for equity up to $5M….

How Long Does It Take to Run an Equity Crowdfunding Campaign? In running an equity crowdfunding campaign you’ll need to budget time to prepare for the campaign as well as run it. Preparations include applying to launch a fundraise campaign. This requires completing a Form C and setting up your…

Equity Crowdfunding Checklist There are several key elements to running a successful equity crowdfunding campaign. Here’s a checklist to consider: Create a campaign plan — list of what you will promote and when.  This includes updates, events, and other activities to promote your fundraise. Build the campaign documents — the…

How to Find More Investors for Crowdfunding Campaigns In running a crowdfunding campaign, you may need to find additional investor groups for your fundraise. These investors include those who are interested in your industry category, or have a passion for the cause, or share the same affinity for the product…