Posts Tagged ‘angel’

What is the role of a VC association, like NVCA? Can they help me raise funds?

Thursday, January 27th, 2011

There are dozens of VC associations around the world (Stern Fisher has prepared a list of them, which you can view online), and most of them provide the following services: advocacy on behalf of the industry (e.g. with respect to government regulations), promulgation of professional standards, training, conferences and research. While VC associations do not typically provide direct assistance to entrepreneurs, the work they do in the areas of training, conferences and research can indirectly help entrepreneurs raise funds.

The training programs organized by VC associations typically cover issues such as term sheets, shareholders agreements and instruments (e.g. redeemable convertible preferred stock). Understanding these topics can help an entrepreneur negotiate with a VC firm, and during the training program the entrepreneur can meet investment professionals of all ages – including both junior associates and senior professionals that are part of the faculty.

Conferences sponsored by VC associations are another good way to meet investment professionals, who otherwise can be somewhat elusive. While you may not have time to have a meaningful discussion, you should be able to at least exchange contact details and set up a time to meet.

Research conducted by VC associations can also be very useful as you plan your fund raising efforts. For example, the directory of members usually contains not only contact information, but also the sectors and stages preferred by each VC firm. Knowing this can save an entrepreneur considerable time and money.

What is the best type of incorporation for a tech company seeking funds (angel or venture capital)?

Monday, January 24th, 2011

Every country has its own corporate laws, but in general angel investors and venture capital firms prefer to invest in corporations in which it is possible to have different classes of shares, such as common shares and preferred shares. This is true not just for tech companies, but also for non-tech companies.

In the USA, Angel investors and venture capital investors typically invest in C corporations with the word “Incorporated” (i.e. “Inc.”) or “Corporation” tacked on at the end. In other countries, there are similar entities.
1. In Germany, Austria and Switzerland best type of incorporation (from the point of view of angel and venture capital investors) is the GmbH (“Gesellschaft mit beschränkter Haftung”, meaning “limited liability business association”), as well as the AG (“Aktiengesellschaft”, meaning “business association with shares”).

2. In the United Kingdom, the usual form is Ltd. (abbreviation for limited company) or plc (abbreviation for public limited company).

3. In France, Switzerland, Belgium and Luxembourg the best form is “SARL” or “société à responsibilité limitée” (“company with limited liability”) or SA “société anonyme” (abbreviation for anonymous partnership).

4. Italy uses “Srl”, or “Società a Responsabilità Limitata” (limited liability company) and “SpA” or “Società Per Azioni” (stock corporation).

5. In India the usual form of incorporation is a “Limited” (i.e. “Ltd”) company, also known as “Private Limited” if the number of shareholders is small.

Angel investors and venture capital firms typically do not seek to invest in partnerships, sole proprietorships. Pass-through entities, such as S Corporations and Limited Liability Companies, are also not preferred by angel investors and venture capital firms. There are many reasons for this – for example, unlike corporations, LLCs are not required to have a board of directors or officers.

If you received Venture Capital then do you have plan to return this fund to Investor ?

Wednesday, January 19th, 2011

Even if you don’t want to prepare a plan to return the funds to investors, a good Venture Capital firm will ask you to prepare one since the funds that they are investing do not belong to them; their funds have a limited life and they’ll need to liquidate their holdings in order to return the funds to their investors (called Limited Partners) before the dissolution of their fund. Some term sheets will include a redemption clause, which will specify a date by which you will need to return the funds to the venture capital firm. The typical exit options for venture capital include the following:
1. Company buyback of shares: This assumes that the business will be generating relatively large cash flows, which is often not the case for early stage companies that are focusing on growth rather than profits.

2. Sale to another VC firm: This is called a secondary private equity transaction.

3. Initial Public Offering (IPO): This is often preferred by entrepreneurs because they can continue to manage the company.

4. Sale of company to a strategic investor: In this scenario, you will probably have to give up control of the company. Also, the venture capital firm will be entitled to a liquidation preference, which means that when the company is sold, they (as preferred shareholders) will get to collect their funds first before any of the common shareholders.