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The Investment Process

These are steps the investment process generally follows :

OPENING NEGOTIATIO NS

Referral to Investor Initial Contact Follow Up Presentation Opening Moves Draft Term Sheet Valuation

THE DUE DILIGENCE PROCESS

Market and Technology Validation Intellectual Property Ownership and Protection Financial Analysis Board of Directors and Board of Advisers Due Diligence Red Flags Final Term Sheet and Resulting Documents Shareholder and Buy-out Agreements Deal Closing

OPENING NEGOTIATIONS
Get A Referral To Investor Referrals through a resource trusted by an angel carry far greater weight than many other introductions. Angels rely on their lawyers, accountants, close friends, and business partners people they are sure are looking out for their best interests. Initial Contact Do not use a standard introduction for all angels; customize each communication. Many angel investors will rule out entrepreneurs on typographical errors or bad grammar and do not want to waste their time.

OPENING NEGOTIATIONS
Follow Up o Know the difference between being persistent and being annoying. o Know a no o Go to the investor o Ask for a reasonable period of time, such as forty-five minutes o Do not stack meetings.

OPENING NEGOTIATIONS
Presentation o Practice your presentation on safe audiences repeatedly o Customize your presentation if possible o Dont directly ask for money, but open the door for the money o Promptly after the meeting, follow up with a thank-you note, preferably handwritten.

OPENING NEGOTIATIONS
Opening Moves In your correspondence with Investor setting up the office visit, make sure you mention the need to sign a non-disclosure agreement. Find out what investor is particularly interested in discussing Clean up the offices. Draft Term Sheet Valuation

THE DUE DILIGENCE PROCESS


Market and Technology Validation Provide validated market analyst reports on your product and your market. Be sure to have a complete and accurate section on competition in your business plan. Intellectual PropertyOwnership and Protection Make sure you take all necessary steps (maintaining confidentiality, filing provisional applications and so on) Employee proprietary information and inventions agreements are a must A red flag for investors is an arrangement in which the founder only licenses technology to the company rather than assigning ownership.

THE DUE DILIGENCE PROCESS


Financial Analysis
Financial projections that include a diversified customer base with multiple products off a broad-platform technology. Markets being entered in a thoughtful, calculated manner, with strong support for your choice of the first market. A well-mapped-out process for introduction of products. Enough flexibility in your numbers and your mind to adjust your projections should an unanticipated market show strong interest.

Board of Directors and Board of Advisers


Having advisers will add value rather than just contribute names and rsums to your documentation.

Due Diligence Red Flags


No investment by founders Numerous small investors, especially friends and family. One-trick ponies. Claims of no competition. Any portion of funds being used to cash out earlier investors or pay liabilities. Lack of participation by earlier investors (if relevant). Prior financings have greater protection and more favorable terms. A history of failure by the management team.

Due Diligence Red Flags


Family business. Multiple licenses required for practicing technology. Heavy debt. Hockey-stick growth projections. Key assumptions missing in financials. No board of advisers or board of directors, or only internal parties on either board. An entrepreneur who wants total control. Unrealistic valuation

FINAL TERM SHEET AND RESULTING DOCUMENTS


The final terms should be a win-win.
Also think about these questions:
Who is driving the investment terms? Venture capitalists almost exclusively require that the company cover their legal costs as well, but angels typically foot their own legal bills. How many angel investors do you want? One of the many advantages of angel groups is the access to many angels and the likelihood of multiple investors from the same groups or a couple of different groups. What are your long-term funding needs and how does this affect decisions on early investors? Sophisticated angels will understand your need for creating incentives rather than disincentives for follow-on funding. At the same time, you need to understand that angels are entitled to protect themselvesthey are taking a great risk on you.

FINAL TERM SHEET AND RESULTING DOCUMENTS


In negotiating the deal, understand each of your angel investors as an individual and let them get to know you, because angel investing is a personal decision. After all the negotiations, make sure your lawyer is experienced in early-stage funding and able to guide you through the document creation process. Shareholder and Buy-Out Agreements
For professional private equity investors: Control of ownership is important. Buy-out agreements are particularly useful for companies that forecast high margins and strong cash flow but have limited ability to realize the traditional exit strategies, an acquisition or IPO.

Deal Closing
One key lesson should be to plan ahead so you do not run out of money before investors are ready to invest.

SUMMARY THOUGHTS
Be prepared; stay two steps ahead of your prospective investors. Act professional; be professional. Recognize that investors enter due diligence with the thought of doing a deal and are looking for deal killers. Make sure you have a rough term sheet done before entering due diligence to avoid wasting your time and that of the investors. Discuss mutual expectations sooner rather than later. Dont think you can make an ill-fitted relationship work.

SUMMARY THOUGHTS
Discuss mutual expectations sooner rather than later. Be open and honest at all times. Better you say something than the angel find out through other means. Angels dont expect a fully staffed company, but you should know what else you need to cover. Have the best advisory board you can assemble. Remember, angels put more stock in third-party opinions of your company than in your own self-praise. You are supposed to be enthusiastic and totally committedthats passion, and essential, but it means angels will take what you say with a substantial grain of salt.

Chapter 9

After the Investment


COMMUNICATE REGULARLY - ALL THE NEWS Give an honest and regularly information. LEVEL OF INVOLVEMENT Angel involvement on our new company is depending on their characteristic. ANGEL VALUE Reason or value someone becoming an angel investor. Patience to exit

Exit Strategy
IPO Merger & Acquisitions

Successful Entrepreneurs characteristic


Passion Coachability Open, consistent, and timely communication Honesty and forthrightness Team approach Strong adviser Focus on the end game