Posted on Saturday, 16th January 2010 by admin
For a start-up, the first round of investment can be the hardest. Without enough proof of concept to go to a venture capitalist, many entrepreneurs turn to their family as investors. Depending on the structure of these investments however, you could be setting yourself up for a more difficult pitch when the second round comes. Inc. gives advice on structuring family investment to maximize the possibilities of future capital requests.
So when Aunt Gladys starts fumbling in her carpetbag for a checkbook, talk her gently out of an equity stake. Instead, structure the investment as convertible debt: a loan that gets swapped for equity in the next big round of financing, says David Cohen, a venture capital investor and CEO of TechStars, a Boulder, Colorado-based angel fund. Convertible debt is attractive because you don’t have to set a valuation as you do with equity. Overvaluing the company risks diluting your family’s shares in the next round.
Because we all love our Aunt Gladyses, entrepreneurs often offer convertible debt holders the opportunity to swap the debt for equity at a discount. But excessive discounts can turn off VCs, says Jonathan Treiber, co-founder and CEO of RevTrax, a New York City-based company that helps retailers track which online ads lead to in-store purchases. Treiber offered his first rounders a 20 percent discount, which ruffled no feathers when he partnered with institutional investors two years later.
Click here for the full article
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