[{"mobileForumsComments":[{"uid":"39b8a5fc-92df-11e3-814c-001372652830","profilePicture":"/images/ico/male_user_large.png","studentName":"Sean Owen","comment":"

I can offer a few observations based on watching some early-stage seed and VC activity here.

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I think your best way to retain equity is to sell less of it now. I know, it sounds like a smart-aleck answer, but I think it's the best one. Your equity is cheapest now, so raise only what you need. Seed money is for getting from concept to first commercial traction with a product, and an e-commerce startup probably doesn't need $1M to get there.

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The other way is to negotiate a better valuation, yes. On average, angel investors are going to pay a valuation that's \"too high\" already. The valuation is often more than what a VC would pay farther down the road, after more progress has de-risked it; even when it's not, I think it's often not low enough to justify the risk. So, in general I don't think that decent startups have a problem with getting a bad valuation from angels; you have every right to negotiate in their interest here but may be the wrong place to push.

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Rarely, getting a good valuation causes problems, if the investment agreement gives the initial investor some significant rights. For example, if the first VC round that follows is at a significantly lower price and the angel has some blocking rights, he/she may be unwilling to allow the funding round to proceed, even if it's at a \"reasonable\" price if it's significantly less than what he/she paid. So, I would focus more on negotiating away any complex rights like that, not so much the price.

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Finally, if you really want to maximize value of the company at this stage, I'd comment that a good angel is not investing in the concept, or the projected profitability. Concepts are cheap, and there is quite literally no new idea that hasn't been proposed 10 times. The projections at concept stage are a near-complete fiction anyway.

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The good angel is investing in a team and a market opportunity -- that these folks will do *something* big in this important new area, whether or not it's the plan and concept on the table. So, maximizing your valuation is really about fielding a team that has the essential skill set, can work together, and is headed into a market with growth potential.

","writeFullMiniDate":"Dec 29, 2011 12:14pm","isAdminOrOfficer":"false","writeLike":null,"isMe":"true"},{"uid":"39b9353a-92df-11e3-814c-001372652830","profilePicture":"/images/ico/male_user_large.png","studentName":"Alex Jaskowiak","comment":"

Hi Vikas,

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I would agree with Sean but would like to expand on some points a little.
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At the inception, the valuation of your business is at the lowest. The investor risk is high and investor's return expectations are maximum. Therefore try to break down the evolution of your business into the basic logical steps or stepping stones, each representing the logical conclusion of a certain major period/episode in the development of your company (each stepping stone then needs to be granulated into the milestones or mid-period check-points).
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For example, the fist stepping stone (I am just guessing) might be reaching: design concept, programmming and testing and deployment. To do this you would need an X amount of capital. 
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Then, try to figure out the MINIMUM possible cash that you would need to get your company to the very first major stepping stone (described above). This minimum cash requirement would be the very maximum you would be asking at this stage when the cost of capital (i.e. the price you would be paying by giving away your equity) is the highest. Do not get greedy, just ask for the right amount of capital to take you to the first stepping stone. Do not aks for more, i.e. do not ask for cash to take you to stepping stone 2, 3 and further down the road.
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You may discover that 1M projected is way too much to get you to the very first stepping-stone. In Series B, when your company valuation (given you are meeting the milestones) is much higher compared to the initial stage, you might want to ask for more and your higher valuation will dilute investor's share in your equity (i.e. your higher valuation will shield you from diluting your own share). But you will start to worry about the Series B financing (i.e. financing necessary to take you to the second stepping stone/major episode) when you are reaching the first stepping stone in the development of your company.
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As far as the protection is concerned, do not try to impress investors with smart projections - the investors would not pay too much attention to your projected figures as this is an additional assumption added on top of the existing assumption. What the investors would be paying attention to, is the cash generation/consumption curves and the cash break-even timing. Try to match the realistic timing with the funding rounds and emphasise the experience of the management team, the market potential and also try to demonstrate alternatives to your existing stepping-stones thus showing your creativity in building alternative scenarios. Try to leverage the market potential to show the big-bang exit potential thus focusing investors' attention on the possibile reward at the end of the tunel.
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Also, try to prove that an X amount of capital invested as seed and/or Series A would boost the valuation of the company to very high levels when the comany has reached the first stepping stone (ideally, the valuation would be 4x the initial valuation). This will both decrease the price of capital and your equity dilution.
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Kind regards,
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Alex
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","writeFullMiniDate":"Dec 29, 2011 7:14pm","isAdminOrOfficer":"false","writeLike":null,"isMe":"true"},{"uid":"39b9bb72-92df-11e3-814c-001372652830","profilePicture":"/images/ico/male_user_large.png","studentName":"David Smith","comment":"

Vikas,

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 If the company *must* go back to the venture capital markets often (each stepping stone) doesn’t this create valuation issues in times of scare liquidity? (2008-2010)

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Also, doesn’t it also allow the VC a much easier option to “cut and run” since the initial investment was smaller, i.e. $200k vs. $1M?

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Additionally, as a new entrepreneur, the odds that their ability to forecast costs accurately are very low hence asking for the minimum is almost certainly too little and if an entrepreneur doesn’t know how to forecast revenues and create meaningful growth targets, they can’t possibly have an accurate way of valuing their company.

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 These all seem like disadvantages for the entrepreneur whose job is to protect the business idea, not the VC firm.

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 -David S.

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Useful link: http://lifehacker.com/5863744/have-a-math-formula-to-increase-your-edge-in-negotiation-and-other-negotiation-tips

","writeFullMiniDate":"Dec 29, 2011 7:38pm","isAdminOrOfficer":"false","writeLike":null,"isMe":"true"}]}]