Winning Angels: the seven fundamentals of early-stage investing
Structuring in Winning Angels is the terms of the investment and what the investor receives for the capital investment. Investors could receive common shares, preferred shares, interest on capital, rights, or warranties in the terms of structuring.
On average, there are two views within the Angel investor community; structuring is essential, or it is pointless. The angels that view structuring important pay close attention to how the proposal is structured; knowing that the structure will predict how things will work on the sequential rounds of investment. The Angels that find structuring irrelevant will take just about any kind of compensation; common, preferred, or convertible shares. These angles are more focused on the person behind the deal than worrying about the details of structuring.
The three fundamental structures covered in this book have been: common, preferred, and convertible.
The common stock option is the structure if the investor has complete faith in the business. Some investors consider this option to be for fools because there is no downside protection. On the opposing view, the entrepreneur has no protection either. The reason why this option is used, with no protection for either the investor or entrepreneur, is that common stock is rather simple and fast.
The preferred stock option is referred to as “preferred convertible with various terms.” As the term mentions various terms, this option is more complicated. Preferred is time-consuming during the structuring and continues until the exit point. This option offers downside protection for the investor by placing them ahead of the common shareholders and entrepreneur. The main reason this option is proposed is that someone has already spent the time structuring the proposal to entice the best investors.
Convertible note with various terms is similar preferred convertible with various terms except that the price of common stock is not set until after the venture capitalist (VC) round of investment. This option is just as complicated as the preferred stock option but is more attractive to most VCs.
What does all this mean to the entrepreneur?
As I have done with the previous sections I will try to lay out how this information can be useful to the entrepreneur. While reading this section it was harder to wrap my brain around how this would be useful to the average entrepreneur, and I struggled for a few days. The average entrepreneur will never take their company public and have stocks and shares associated with the business. However, as I mentioned compensation towards the beginning, an entrepreneur could work with an investor and structure a proposal in a way that pays interest or dividends on profit. The one thing to remember is that if the product or service of a business is solid growth could exceed even the original concept of the business owner. Sam Walton, the creator of the Walmart empire, only set out to have a grocery store that he could be proud of, and now Walmart is a publicly traded company that has locations across the globe.
Amis, D., & Stevenson, H. H. (2001). Winning angels: the seven fundamentals of early-stage investing. London: Financial Times Prentice Hall.