Out of each of the lessons we have studied throughout the course in our supplementary reading material Winning Angels by Amis and Stevenson, structuring is probably the most challenging for me to comprehend thus far. While it was somewhat easy to understand sourcing and evaluating; a tad bit more difficult to grasp the process of valuing; structuring is a whole nother’ beast!!! At the very least, structuring is how entrepreneurs and investors arrange the investment deal so that both parties (in some cases) can recoup the fees that have been poured into a venture. Sounds easy enough, right? Well, not so fast smarty-pants!!!

     Although I don’t have any prior knowledge of structuring deals, I know that one day (soon) I will be in a position to be able to do such things and I want to make sure that I’m not being handed the short end of the stick. As Bill Sahlman states in the book, “With respect to the whole deal valuing, negotiation and structuring you have to have had a lot of experience of good and bad deals to know what’s really important in the transaction.” As a novice, I would only hope to have knowledgeable and trustworthy investors like Sahlman to ensure that I’m making the right decisions not only for myself but also for the business and those who have invested their capital to back my dreams. As Amis and Stevenson put it, “Winning investors make sure the entrepreneur is going in the right direction.” Following the advice of other angel investors, the authors suggest making a monthly report to provide transparency and accountability an integral part of the investment agreement so that stakeholders are consistently aware of what’s going on with the organization. While investors may not have the time to hold the entrepreneur’s hand through every single decision, they can be made aware of these decisions through monthly reporting to better ascertain how the company is progressing and what may need to transpire to ensure future successes.

     Whereas structuring seems easy enough, it’s when you get into how the financiers would like to receive an ownership stake that things start to get tricky. For instance there is common stock and preferred stock (click here) for a better understanding of both! And, as if that’s not confusing enough, there are even convertible preferred stocks (click here, again)! Not to say, I told you so…but I told you.

     Amis and Stevenson advise that, “in structuring, simplicity is best to maximize the chances of entrepreneurial success.” They go on further to expound that, “complicated structures create more work and less flexibility down the road.” It is certainly important to note that here is an area where seasoned investors can unquestionably take advantage of inexperienced entrepreneurs. While we have previously discussed how dishonest entrepreneurs can prove detrimental to an organization, it is critical to recognize that acquisitive investors are equally as damaging. As angel investor Berkus (whom I’m starting to like more and more) states, “In my structures, I have kept them clean because I want to have a trust built between the entrepreneur and me. So I almost always start my investment strategy with a common stock investment and usually try to form it with the founders at founders value….”

     Whether being financed or in a position to invest, I certainly want to model after my man Berkus. I mean surely there’s a way to find common ground so that both parties can feel that they are not being conned. As we’ve discussed previously, this all goes back to the initial relationships that have to be established with trust and confidence in all who are partaking in the deal. Additionally, clear expectations of what each member should bring to the table need to be asserted as well as what each stakeholder will anticipate in return for their time, efforts, and in most cases their dough!

 

References

     Amis, D., & Stevenson, H. H. (2001). Winning angels: The seven fundamentals of early-stage investing. London: Financial Times Prentice Hall.

    Hayes, A. (2020, February 25). Preferred vs. Common Stock: What’s the Difference? Retrieved June 10, 2020, from https://www.investopedia.com/ask/answers/difference-between-preferred-stock-and-common-stock/

     Mitchell, C. (2019, June 25). Convertible Preferred Stock Definition and Example. Retrieved June 10, 2020, from https://www.investopedia.com/terms/c/convertiblepreferredstock.aspHayes, A. (2020, February 25). Preferred vs. Common Stock: What’s the Difference? Retrieved June 10, 2020, from https://www.investopedia.com/ask/answers/difference-between-preferred-stock-and-common-stock/

30 thoughts on “Structuring

  1. Nice post! For what it’s worth, I think you have a better grasp of “structuring” than you’re giving yourself credit. While the details of terms, options, common stock, preferred stock, etc. can be difficult to understand, I believe your instinct to model behavior after Berkus is spot on. Two elements continue to jump out at me in the reading of this book, regardless of the section: simplicity and character. If you have those, you’ve got a shot. Missing either? Hmm – probably not going to end well. Close examination of Berkus and his methods shows that he’s leaning into these two traits more than anything. When deciding when to invest he has a simple 6-step procedure that he puts any company, regardless of makeup, through to determine if they’re a fit. Very general, very consistent, and beautifully simple. Once he’s identified a potential fit he wants to “have a trust built between the entrepreneur and me.” Berkus is evaluating character and determining whether or not this is the type of person with whom he wants to work.

    Certainly I have boiled “structuring” down a bit roughly in this synopsis due to my own rudimentary understanding of the section, but as a novice myself, I am also hoping for guidance where I can find it. I think you have identified a great asset in Berkus and I will be paying close attention to his methods as well.

    • Hi Trip,
      Thanks again for stopping by! Although I don’t feel as if I’m deserving of the credit, thank you! Structuring seems (to me) one of the most difficult aspects of investing to understand (especially when you throw in the variety of stock choices) however, you are absolutely right. Keeping things simple and maintaining your character have been two elements that are consistent throughout the book.

  2. The less complicated the better when structuring an investment. Just like anything else, the more moving parts, the more likely something will go wrong and the more time will be spent by all parties mitigating. Similarly, trust needs to be part of the investments structure, which you pointed out. Trust can be baked into a financial deal, through a straight forward language and simple investment structures. Additionally, trust should have already been built during the evaluating stage, or at least the foundations of a trusting partnership should have been laid. Without trust, perverse incentives can easily creep into deal structures and poison a businesses and its people, which will lead to a toxic culture and a breakdown in of the relationship between the entrepreneur and the investor.

  3. Tiffany,
    Bill Sahlman is correct with his statement that having experienced both bad and good deals allows us to truly understand the various components that help to make a deal. As entrepreneurs it takes years of experience to better understand business deals and how to adjust. Great post!

  4. Hello Tiffany, Relationship is key to making these types of deals. As novice entrepreneur, I would definitely have an independent professional, such as an accountant or lawyer on my side when talking about structure. If the entrepreneur feels taken advantage right at the beginning, that will probably lead to trouble down the road. One thing is for sure, the investor is going to want a significant return, so the entrepreneur needs to understand this going into the deal.
    Best regards,
    Mike Weimar

    • Yes! Mike, as we delve further into the course I have certainly learned that it is tough to maintain a business singlehandedly. It is wise to have reliable individuals to handle aspects of the venture that may be unfamiliar (i.e. legal ramifications, accounting, etc.) to ensure success and discourage decisions that can be detrimental to the business in the long run.

  5. Hello, Tiffany,
    I agree with Tripp’s comment above. It seems like you have a good grasp of structuring, as well as you had in the previous three segments. I agree with the concerns that certain investors would prey on inexperienced entrepreneurs for larger gains. This is common in real estate (get rich fast schemes – a.k.a flipping houses) and similar “hot” markets, The true entrepreneur should always consult with lawyers, bankers, and several investors before striking a deal. What seems to be an issue with some start-ups is the fear that someone will beat them to the punch so they fall prey to bad deals. After all, getting beaten to the deal may end up with better consequences than making a bad financial decision and end up ruining your chances of future deals or projects. There should always be a fair, win-win structure, whether the investor is willing to get involved in the operations or not. That’s my two cents.

    Best regards,
    -Semir

    • Hi Semir,
      Thanks for stopping by! The underlying theme throughout this book seems to be trust. By ensuring that both parties are characters who deem integrity to be highly regarded traits, it seems that challenges that will routinely arise will be worked out efficiently by the individuals involved.

  6. As some others have hit on, I think a lot of structuring boils down to trust that was built in the earlier stages of investing. Structuring, for me, was also one of those sections where I had to read a few times to get a foundation to start and understand the entirety of the process. I think my biggest takeaway was that in this process, specifically, you need help by your side to know you are taking all of the necessary steps to set yourself up for long term success.

    • You are not the only one, I certainly still have not grasped all of the “structures” that can be implemented through shares, rights and so forth. It is definitely an area where I would need to study more before signing anything relating to the structure of a deal (especially when it comes to collaborating with a more experienced angel!) I would absolutely get assistance if I’m ever in this situation because I want to make the best deal for the venture to succeed and furthermore feel good about doing so! I hate making a decision and then mulling over it later, feeling as if I could’ve made a more informed choice…

  7. Travis Wolfe-Schiestel says:

    I agree that this section was the most cumbersome to digest, largely due to the introduction of quite a few technical terms. It was definitely worth it though, as I found it full of quite a bit of actionable insight. While I certainly am a long ways off from being in a position to be an angel investor, knowing how they think will undoubtedly better equip me as an entrepreneur when I go about raising funds for my own startups. I agree that one of the major takeaways is the critical priority of cultivating a working relationship built on trust and mutual respect. For this reason, I plan to always offer certain things like tag-along and preemptive rights from the onset as a show of good will. Great post!

  8. Hi Tiffany! I actually (shockingly) enjoyed reading about structuring. For me, this seems like the most concrete part that works a lot less with the abstract. I think the complicated thing about it for me personally is that I have been totally SCREWED in deals. I want to be sure that I know more about what my ‘non negotiables” are and how to construct the right language to ensure that I am communicating clearly while also making sure that I am clear about my boundaries. As a note I hope you remember that things are difficult to comprehend the first time you read them, you are going to be a rock star at whatever structure format you choose!

    • That is certainly one of my worst fears! I see the importance of having an attorney to view the structure to ensure that this does not occur. Additionally, I like for things to be fair, especially where my partners are concerned! With this in mind, if the structure doesn’t work for them I would want to go back to the drawing board until we both feel “good” about the deal.

  9. Shannon Shepherd says:

    Tiffany,
    I agree that having an investor help with decision making is a must. A novice is unable to see the roadblocks or obstacle that are up the road. Having a partner that has been down the road before help you navigate the path is a winning situation. Also when it comes to structure I believe simplicity is the best route as mentioned in Winning Angels. I enjoyed reading your post.
    Best,
    Shannon

    • Yes, I have come to understand that in business, experience is key. Having an individual with the expertise to back you may not ensure success, but it will certainly be and undeniably strong competitive force against failure!

  10. I think you don’t give yourself enough credit! It seems as if you grasp the structuring section really well. I know you will have great success with it if you keep it simple and if you stick with your choice of no structure or having structure. Good job on your post!
    -Marie

    • Thanks Marie, these topics were certainly a little more challenging to understand; but, you are absolutely right. Like most things in life, keeping it simple will ensure that everybody is on the same page and understands what they are investing and subsequently harvesting from the business.

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