the logistics of working with investors

**Serendipity** · 06-01-2007 01:58 AM

I'm starting my research to confirm if the apparent need is really one that others perceive as well. I am writing the script and developing the concept for an educational video series. I will need a diverse team of talented people as well as huge capital.

I am lining up an advisory board. I need to know, after my biz plan is developed, when it comes to working with investors, how do individuals secure their piece of the pie? i.e. if I have no money invested, only sweat equity, then how do I work w/ investors to determine what's theirs/what's mine? How do the financial agreements get worked out? What do the contracts look like? How would I ensure that I'm working with people who have the same vision or who are most interested in what's best for the whole?

What more do i need to know? What questions do I need to ask?

Any recommended sites or books appreciated so I can research more.

Much gratitude...
Celosia

**The Stealthy One** · 06-01-2007 06:54 AM

Celosia,

It's probably not the answer you want to hear, but it's most often the truth: investors decide what you get, take it or leave it. They are not usually flexible in what they're willing to leave over. However, this is not necessarily a bad thing: if your company is projected to grow quite large, even just 5 or 10% ownership would entitle you to a nice bit of wealth.

One question: are you going after venture capital or angel funds?

**crackah** · 06-01-2007 07:57 AM

Yeah, i was reading that a large franchise here in Australia, which does child care centers, the owner only owns about 10%, yet is a multi multi millionaire!

**Serendipity** · 06-02-2007 09:51 AM

What's the difference between venture capital and angel funds?

PS Angels are awesome.

**Will** · 06-02-2007 09:57 AM

An angel investor is someone who is interested in helping people grow their businesses etc... they are usually wealthy/retired businesspeople who want to do something with their money and are still interested in business. From what I know (im 17) is that they dont ask as much from their money though ofcourse they would want some returns.

Venture Capitalists are in it for the money, and quick money. I think they usually aim for about 3 years to get their money + profit back and they are hungry for it, so will run a hard bargain eg. leaving you with smaller ownership.

**akula** · 06-02-2007 11:47 AM

Originally Posted by Serendipity

I'm starting my research to confirm if the apparent need is really one that others perceive as well. I am writing the script and developing the concept for an educational video series. I will need a diverse team of talented people as well as huge capital.

I am lining up an advisory board. I need to know, after my biz plan is developed, when it comes to working with investors, how do individuals secure their piece of the pie? i.e. if I have no money invested, only sweat equity, then how do I work w/ investors to determine what's theirs/what's mine? How do the financial agreements get worked out? What do the contracts look like? How would I ensure that I'm working with people who have the same vision or who are most interested in what's best for the whole?

What more do i need to know? What questions do I need to ask?

Any recommended sites or books appreciated so I can research more.

Much gratitude...
Celosia

hi ceosia

just checking if you're still here and in need of answers to your questions

i've worked with both with angels and institutional investors and can field your queries...if you're to listen, that is

**Serendipity** · 06-04-2007 12:16 AM

I absolutely do need answers and your knowledge is really appreciated. I'm definitely listening, so shoot...

Best wishes,
Celosia

**akula** · 06-04-2007 06:39 AM

Originally Posted by Serendipity

I'm starting my research to confirm if the apparent need is really one that others perceive as well. I am writing the script and developing the concept for an educational video series. I will need a diverse team of talented people as well as huge capital.

I am lining up an advisory board. I need to know, after my biz plan is developed, when it comes to working with investors, how do individuals secure their piece of the pie? i.e. if I have no money invested, only sweat equity, then how do I work w/ investors to determine what's theirs/what's mine? How do the financial agreements get worked out? What do the contracts look like? How would I ensure that I'm working with people who have the same vision or who are most interested in what's best for the whole?

What more do i need to know? What questions do I need to ask?

Any recommended sites or books appreciated so I can research more.

Much gratitude...
Celosia

okey dokey....celosia....my role here is to get you up and running as quickly as possible so you can show at least some kind of cashflow. to do this, I have to note all the classic mistakes that you're making (which are getting in the way of you making money) such as "I am starting my research to confirm if the apparent need exists" and "after my biz plan is developed, when it comes to working with investors".

The overall message is positive. I've given you the answers to the questions you've asked. The answers provide you guide lines for how to start companies, how not to start companies, and how to think about the financing process (including private equity).

Essentially (and this is the only bit of unsolicited advice here), you've gotta leave these imaginary fairy tale stories of you gambling with other people's money for books of fiction. Follow Peter Ireland's guidelines, stop falling to confirmation bias, drop the feel good story you're making up in your business plan, instead, do your primary market research, get some orders for your product, take some deposits, use the deposits to fund production, make some sales, book a profit and go from there.

Wanna ignore this advice? That's fine. I'm not partial either way. In this case, I hope you don't end up becomming an antivc statistic. Alternatively, if you do wanna proceed with this hussle for money, I can answer your other questions.

Q: how do individuals secure their piece of the pie? This is done using premoney valuations. For an example, see here.

Q: How do the financial agreements get worked out? A letter of intent is signed (LOI), this leads to a term sheet being offered to the investee, and this leads to a securities purchase agreement.

Q: What do the contracts look like? They look like this, and there's a lot of other samples.

Q: How would I ensure that I'm working with people who have the same vision or who are most interested in what's best for the whole? This is done through peer filtering (and venturesource) which overcomes the inherent asymmetry in motivations for founders and investors (i.e. the investor wants the cheapest securities and most control, while the founder wants the highest premoney valuation and giving up the least control). Also, the more important concern is not whether the financier has "the same vision". That's not important. The main concern is whether the financier can do uprounds, and whether she can find a place in a syndicate. Companies are killed when there is an inappropriate, seed stage, "lifestyle" angel on board who is unable to provide expantion stage capital for the company, nor concede her postion to alternative investors.

Q: What more do i need to know? You need to know a few things;

A) You need to know how SEED STAGE (as opposed to other stage) educational video startups get financed. They do not get financed with external equity investment. These kinds of startups get financed via multifaceted financing packages which include founder savings, trade credit, customer finance and debt. You need to understand that startups are financed in STAGES and that at seed stage, plain vanilla equity finance does not happen. You will not find any educational video startups who've done their seed stage finance with external equity. At expansion stage it does happen, but not at seed stage. There are important practical reasons for why this is so.

B) Secondly, you need to know WHO is doing expansion stage educational video plays, as there's only a couple of these guys (and you need to kno their preffered deal stage/size). PARTICULARLY, you need to know investors who've had successful exits on these kinds of plays. Then, you need to contact the founders who've had successful exits on educational videos, and you need to get them on your board. This information is found in venturesource.

Q: What questions do I need to ask? There's a number of questions that founders ought to ask financiers. All of these are quite unimportant in priority to other questions. A) Founders need to talk to people other than financiers (i.e. customers) B) Founders are in a much better position if they are approached by the financiers rather than the other way around. This happens when founders follow the golden rule of capital seekers: If you ask for advice, you may get capital. If you ask for capital, you will at best get advice.

In essence....most founders have zero clue about the financing process and make all the predictable mistakes documented at length by Peter Ireland. Founders from all walks of life will be a lot happier and wealthier if they follow what Peter tells them.

**Serendipity** · 06-04-2007 06:48 PM

thanks for the wealth of info you've offered. I really appreciate your taking the time and how straight forward you are. I have some reading to do and I'm sure I will have more questions but this is good.

I had figured I'd be working on the seed stage on my own- that's great and what I really want right now anyway.

Thanks for now,
Celosia