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Real investors price their equity deals

Real investors price their equity deals

15:01 20 February in Blog
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That’s right, real deals need to address the tough fundamentals like valuation and corporate governance.

It’s become popular to do “gentleman” investments where nobody gets there hands dirty. This also seems the easy way for beginners to get started.

The real investors address the real issues that are foundations for any angel/VC backed company.

Rather than coming to terms with the valuation of the company, the gentleman stay away from offending the entrepreneur by committing money that they’ll let the next round price. This is done by assigning the investment conversion rights based on a discount on the first priced round. This creates all sorts of obvious conflicts since your existing investors actually benefit from your stock going down! It’s a pretty dumb idea. Yes, in special cases it can work but it should be a last resort.

The second problem comes from using convertible debt rather than convertible equity. By keeping it debt, the complexities of corporate governance is avoided.

So the bottom line – raising capital through a “lazy gentleman’s” round is a bad idea. It uses a convertible debt with a conversion based on a discount of the next real round. Let the politicians kick the can down the road. Your company deserves more.

 

Ken Kousky

kkousky@ip3inc.com
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