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  • Train Asked on September 7, 2015 in Other.

    Employee stock options are the most common among startup companies. The options give you the opportunity to purchase shares of your company’s stock at a specified price, typically referred to as the “strike” price. Your right to purchase – or “exercise” – stock options is subject to a vesting schedule, which defines when you can exercise the options.

    Let’s take an example. Say you’re granted 300 options with a strike price of $10 each that vest equally over a three-year period. At the end of the first year, you would have the right to exercise 100 shares of stock for $10 per share. If, at that time, the company’s share price had risen to $15 per share, you have the opportunity to purchase the stock for $5 below the market price, which, if you exercise and sell concurrently, represents a $500 pre-tax profit.

    At the end of the second year, 100 more shares will vest. Now, in our example, let’s say the company’s stock price has declined to $8 per share. In this scenario, you would not exercise your options, as you’d be paying $10 for something you could purchase for $8 in the open market. You may hear this referred to as options being “out of the money” or “under water.” The good news is that the loss is on paper, as you have not invested actual cash. You retain the right to exercise the shares and can keep an eye on the company’s stock price. Later, you may choose to take action if the market price goes higher than the strike price – or when it is back “in the money.”

    At the end of the third year, the final 100 shares would vest, and you’d have the right to exercise those shares. Your decision to do so would depend on a number of factors, including, but not limited to, the stock’s market price. Once you’ve exercised vested options, you can either sell the shares right away or hold onto them as part of your stock portfolio.

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  • Train Asked on September 7, 2015 in Deal Terms.

    Looking at the underlying structure of SPVs they seem to be a perfect fit for a startup seeking funding for its operations for the startups raising capital. The typical minimum investment for an angel investor is $25k or even more. The minimum investment into a SPV can be much lower, which opens a whole new investor base.

    Furthermore all investors are pooled in one single entity which can make life for a young startup company a lot easier. Management only needs to deal with one single point of contact, instead of chasing dozens of people down for signatures. In this case it’s usually the lead VC who organises the SPV or the service provider of the platform. This is a huge advantage especially if seeking financing on startup investing platforms where there could be a ton of people participating on the offering. On the one hand a startup can meet its funding minimum by gathering smaller sums from more individuals and on the other hand it doesn’t have to deal with all of them. Normally these SPVs can fit up to 99 people.

    From experience several professional investors know that the “smaller” the investors the more risk-averse they tend to be. At first glance this seems like something good because it means that if those kinds of investors are willing to put money to work with you, they truly believe that the idea behind the company is solid. However risk-averse investors and especially a person who puts his private savings to work has a lot faster second thoughts regarding an investment and tends to have doubts about the uncertain future of entrepreneurship. This is a clear contrast to an Angel or VC who has experience in startup funding and can bear a potential underperformance of an investment (even though they usually don’t appreciate that). Here lies a clear advantage of a SPV.

    The management doesn’t have to worry about individual investors. It only has to deal with the lead VC or the person managing the SPV. As a young and dedicated startup company it’s much easier with a single point of contact who has a feeling for the market he’s in and who gives you time and space to envision your ideas.

    Hence a SPV can provide an easier access to funding while at the same time retaining the benefits of other funding-models by providing the guidance and mentoring a VC or Angel offers.

    In addition to that, a SPV may not only provide funding, but can also represent a new strategy with regard to tax savings, business and brand management. These benefits arise from the underlying structure of a SPV because it represents a separate legal entity.

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  • Train Asked on September 7, 2015 in Deal Terms.

    Investing in early-stage startups can be extremely profitable. Returns of 100X-plus are seen somewhat regularly. In extreme cases, investors have made 2,000X their money or more.

    Naturally, with such high reward comes high risk. Most young companies do not succeed, and many investments will be total losses. This is why it’s important to invest in multiple startups. In this market, outliers drive returns. To increase your chance of hitting one, invest in at least 15 to 20 companies.

    Investing in 15-plus startups today isn’t as hard as it sounds. In fact, it’s simple compared to even four years ago. With the rise of online startup investing, you can put $1,000 to $5,000 in each opportunity. Prior to the online option, minimums typically ranged from $10,000 to $25,000. Access was far more difficult then, as well.

    That’s one of the best things about this investment class today: the ease of diversification. It turns what is traditionally viewed as an extremely risky, high-cost investment into one where the risks are manageable and the required capital isn’t too high.

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  • Train Asked on September 7, 2015 in Deal Terms.

    Profits are realized through an IPO or acquisition event.

    Early-stage investments take time to grow. If there are profits, investors should expect to wait as long as six to 10 years to cash out.

    Pre-IPO investments can have much shorter holding periods. Let’s say you manage to secure some shares in Dropbox, a company expected to IPO sometime in the next 12 to 18 months.

    You can usually sell them 180 days after the IPO. The 180-day period is known as the “lock in” period, when insiders and private shareholders aren’t allowed to sell.

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  • Train Asked on September 7, 2015 in Deal Sourcing.

    A “pre-IPO” company is one on a clear path to going public: an initial public offering (IPO). These are usually mature companies with relatively stable revenues.

    Just because a startup is private does not make it pre-IPO. That’s a common misconception. The majority of companies at this stage will never make it to public markets. Most will either be acquired or fail.

    Early-stage startups are at the other end of the spectrum from pre-IPO ones. They’re young companies at the beginning of their journeys. Valuations are low, ranging (roughly) from $2 million to $100 million, depending on stage and traction.

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  • Train Asked on September 7, 2015 in Deal Terms.

    It’s almost always one of two things.

    1. Convertible debt: a note that will convert into preferred shares during a future round of funding. Investments structured this way usually have valuation “caps.” If a note is “capped” at $10 million, and the next round values the company at $20 million, your shares convert at the $10 million valuation, giving you more shares than new investors get. Notes typically pay 2% to 8% interest.
    1. Preferred equity (shares): takes precedence over common shares in case of a negative liquidation event. Founders and employees are typically issued common shares.
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