Tips on Investor Money

[tyreandme]

Hey fellas,
I have some investors lined up for a venture of mine.
What steps should I take before taking their money?

-contracts
-precautions
-any other tips

Appreciate the help!

[akula]

alot of things
...as a starting point...the financing round ought to be in a convertible note issue
What are the benefits of debt in a seed round? - Venture Hacks
Comments: Convertible debt - Venture Hacks
http://www.youngentrepreneur.com/for...-up-11389.html

[tyreandme]

thanks for those links, were helpful mr.shark

But a quick question, in order to do deal with the convertible bond method you are suggesting, I would have to incorporate correct, in order to hedge the liability? I am currently a sole prop.

[akula]

ummmm..yea, you have to incorporate...so get that done, it takes 5 mins and then you can write a convertible note to offer your financiers a risk efficient exposure to whatever you're doing

[tyreandme]

Hey Akula,
I have been trying to figure out some numbers, can you check if this scenario is correct.

Needing 40,000 for startup, with 4 investors lined up, all receiving 10% shares for their convertible bonds at a fixed coupon rate.

40000/.4= 100000 (post money valuation)
100000-40000= 60000 ( pre money valuation)

with a 10000 (6/share) share figure, each investor would get 1000 shares during conversion, correct? while 6000 would stay with me

[akula]

hmmmm yea..provided that the note holders end up converting (which they might not, or you might not want them to)..that looks about right
60k pre plus 40k seed equity round equals 100k post*

well almost...there is a possibility of complicating things by trying to put value on the debt round....or by haggling over the relevant discount rate for the equity round pre money valuation (i.e. why 60k?), or by discussing the note holding perioud, the coupon rate and any covenants...but that's not necessary (though, technically these things are important if you're dealing with someone who understands private equity finance)

ummm...the one issue is this...you need 40k cash today. so you borrow it by writing a convertible note with a 40k face value (or four 10k notes) and say a 20%p.a. (?) fixed coupon rate. the guys hold the note for 12 months, the company does well, and so they say "we now want to convert"..but now their investment isn't 40k, it's 48k (i.e. 40*1.2)...so...at a 60k pre, the post will be 108k, and so they get 44% (i.e. 48/108) ownership rather than 40% (i.e. 4400 shares, not 4000)...and if you don't want that to happen, but you still want the 40k in cash (i.e. you don't wanna borrow 33k at 20%) , then your only option is to increase the pre to 72k. in this case, with 72k pre and a 48k equity round, the post is 120k, and that means a 40% share for investors (48/120).

other than that, off the top of my head, without thinking too much about it, the numbers seem fine..as in i don't see any glaring errors

* equity = note principal + coupon