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Early Stage Investing- Structuring

Week 5: Structuring

In reading Winning Angels: the 7 Fundamentals of Early Stage Investing by David Amis and Howard Stevenson, the idea of whether structure is beneficial in an angel investing deal is discussed. I can see both points as to why it is both essential and irrelevant. First off, having some type of structure can lead to better clarity of the situation and information flow. But, I can see how having too much structure could also hinder the deal as well and become too overbearing. Part of the structure itself is the deal terms. Deal terms can include but aren’t limited to NDAs, non-competes, tag-along right, pre-emptive right, registration rights, royalty rights, dividend rights, board rights, information rights, liquidation rights, conversion rights, redemption rights, interest payments, price conversion, warranties and representations, anti-dilution, entrepreneur compensation limits, social voting, and right of first refusal. My favorite piece of advice from this chapter was “keep it simple.” This could get very complicated very fast and keeping the agreement on one page is a great measurement of how simple the deal should be kept. As someone who is investing money in, they of course want their money to be safe, but in my eyes if the deal is too complicated then this is a red flag and the investment will most likely be complicated as well. It seems from this chapter that no two deals will be the same so you really have to do it to learn the best methods for you. As the entrepreneur, this chapter was a great way to understand what an investor does not want in a deal and also how they will try to deal with you as the entrepreneur. It’s so important to be able to see behind the curtain and see your opponent’s cards. When reading through this chapter I think that structuring is very important but also believe that if some of the other stages feel right, structuring will mean less because you trust this team to win. For me, when choosing someone to work for or with, it’s less about the money-that will come, but more about the connection you have to the initiative and whether or not you can do good things together. This might be too fluffy, as I do not have experience being an angel investor, but I do believe in the power of human connection and knowing how to do good work. If those things are in place, I think there is a good chance the company will grow and so will your money. At the end of the day it’s about if it’s worth it. Structuring is important, but if the deal is right then this seems to be one of the stages that can be debated and worked on till a conclusion is made. If the deal is right, it is hard to see how a poor structuring deal would completely turn someone off. I’m sure it happens, but overall, I would hope that this would be the stage of negotiation.

References: Amis, David, and Howard H. Stevenson. Winning Angels: The 7 Fundamentals of Early-Stage Investing. Financial Times Prentice Hall, 2001.

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