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!
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/