![DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW
Some Basic Deal Issues
1. Deal funnel. What is my role? Lead? Trickle-down
theory. Fundamental Resource Limitation Dilemma.
2. Red Flags / Know When to Walk Away
3. Respect the norm, but Make an Occasional Exception
4. Understand the Deal Terms
5. Capitalization Table and Pricing (Pre/Post-Money)
6. Securing Key Financial and Information Rights
7. Surfacing Issues / n-Way Competing Interests /
Alignment / Game Theory / Scenarios
8. Due Diligence – Resources/ Reliance / All parties /
Reputation
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Angel's Doing the Deal, by David Emerson
- 1. Doing the Deal: Structure, Terms, Due Diligence, Valuation: An Overview for the Angel Investor Presented by: David Emerson Disclaimer: Legal, Tax, Int’l, etc. Harvard Business School Angels emerson@post.harvard.edu February 5, 2013 david@emersonlegal.com
- 2. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW Some Basic Deal Issues 1. Deal funnel. What is my role? Lead? Trickle-down theory. Fundamental Resource Limitation Dilemma. 2. Red Flags / Know When to Walk Away 3. Respect the norm, but Make an Occasional Exception 4. Understand the Deal Terms 5. Capitalization Table and Pricing (Pre/Post-Money) 6. Securing Key Financial and Information Rights 7. Surfacing Issues / n-Way Competing Interests / Alignment / Game Theory / Scenarios 8. Due Diligence – Resources/ Reliance / All parties / Reputation [1]
- 3. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW Understand The Deal Terms 1. Convertible Note + Warrant Transactions » Conversion Terms / Discount (Warrant Coverage) / Conversion Pre-Money Cap/ Amendment » Don’t expect note to be paid / Convert to what? » Series Seed Preferred Alternative 2. Preferred Stock Transactions » Reps + Warranties, Disclosure, Setting Terms for Future Deals, Position re Future Rounds / It’s all Negotiable and ..more importantly…Renegotiable [2]
- 4. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW Capitalization Table and Pricing 1. Understanding The Cap Table / Liquidation Preference and Multiple / Priority / Size of Round 2. Option Pool Size / Budgeting / Customary Terms 3. Valuation: comps, multiples, DCF, assets, macro- economic cycle 4. To Infinity and Beyond: Planning for sequential round price appreciation 5. Vesting of Founder Interests / Sweat Equity / $$$ 6. Recapitalizations / Cram-Downs, Pivots and Resets / Soft Landings [3]
- 5. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW Liquidation Preference Dynamics Extremely Simple Example [4]
- 6. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW Liquidation Preference Dynamics Somewhat More Complex Example [5]
- 7. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW Securing Core Economic and Info Rights 1. Protection Against Buyer’s Regret: Anti-dilution Rights (weighted avg./full ratchet); Staggered closing / milestones 2. Voting Rights / Aggregate or Series / Proxy / Drag Along / Tag Along 3. Information Rights 4. Blocking Rights 5. Right of First Refusal / Participation Rights 6. Advisory Board? Director? Fiduciary Duty / Liability [6]
- 8. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW Getting Issues on the Table 1. Importance of Reps + Warranties and Disclosure Schedule 2. Nebulous IP Ownership Issues (transfer to NewCo?) 3. Cap Table land mines and rats nest complexity 4. Litigation time bombs – valuation adj. 5. Problematic Contracts / Compliance / Informalities 6. Problems - Knowing What to Cure and When 7. Upside and Downside Exit Strategies – Who gets what? [7]
- 9. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW Founder Issues 1. Allocation of Equity 2. Sophistication / Experience (use of advisers) 3. Honesty / Personal Integrity / Know success and failure 4. Stock Vesting – reset of vesting 5. Power issues – Titles / Multiple founders/ Control 6. IP issues – Past Employers, Outsourcing 7. Board Seats / Balance of Power 8. Employment Agreements / Non-competes [8]
- 10. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW Due Diligence Issues 1. Fundamental Resource Limitation Dilemma. Avoid duplication of effort / team approach / reliance 2. Systematic – checklist approach 3. Reflect findings in reps / warranties 4. Deep Domain Expertise - Ph.D., market, contacts 5. That’s nice, but how do you make money? Quality of revenue / earnings 6. Detailed Financial model – unstated assumptions 7. Meet with Founders, key management [9]
- 11. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW Intellectual Property Due Diligence Overview ■ Do you have the deep Domain Expertise? ■ Types of Available IP ■ Patent reality vs. Patent fantasy - value/enforcement ■ Patent Strategy 101 ■ Traps for the Unwary [ 10 ]
- 12. DOING THE DEAL: AN ANGEL INVESTOR OVERVIEW Types of Available IP Patent Two- Legged IP Trademark & Know-How NewCo Trade Copyright Secret [ 11 ]
- 13. Thank you.