PLUG, Here's my take; I'm not an investor or even a very sophisticated money person, but I think one can easily make the case that the investors are acting in good faith with regard to the entrepreneurs.
(Full disclosure: I'm one of the people behind Beehive Startups who is organizing the whole thing. Also, I'm an entrepreneur. Lastly (and most damning), I'm a long-time PLUG member.) The reason the investors are doing this is NOT for the actual deal itself, after all, it's only $25k per investor (x 10 investors). * The investment for the 1st place winner is only $15k per investor ($150k/10). That's so small that it's hardly worth the time to do the paperwork for them. Don't get me wrong, that's a lot of money to ME :) * Most startups fail. VCs are engaging in a highly risky market (even when they call all the shots). They're typically super concerned with making the right bet. By participating in StartSLC, they're giving up a ton of that control. After all, they're committing to deploy the funds *sight unseen*. Even if they dislike every deal that's presented, they've committed to pony up the cash. Even if they find a deal or two they like, they could be out voted. * There's "no cap" on this convertible note. When the time comes for the note to actually "convert" to equity, they're going to do it based on your *future* valuation (currently nobody knows what that is). Often, convertible notes will have a "cap". Caps work like this: In the future, when we know the actual value, we can cap it in favor of the VC holding the note. Let's say they put a cap of $5M and 12 months later you're ready to raise money again. You're going to be pushing for the highest valuation you can get. Your new investors are going to be pushing (hopefully tactfully) for the lowest valuation (more bang for their buck). Let's say you settle on a valuation of $7.5M. The VC holding the convertible note gets in at a cheaper price, $5M. If it's too much cheaper, the current VC (and you) might be upset about it because nobody else is getting the same "good" deal. So, caps are good for the investors holding the note. They might even be reasonable protection if done right. Very often they're done poorly and hurt the entrepreneur and future deails. Again, this note is clean. No caps attached. * No discount. If you read the long-winded paragraph above, you'll get discounts quickly. The basic idea is that the note converts at some later date when we know the company's valuation. Whatever the valuation, the VC holding the note gets a discount off that price. It seems like a reasonable measure for someone who took the risk early on. However, these are often done in a way that can make future funding rounds strained from the perspective of the future investors or current share holders. Again, this note is clean. No discount attached. Why are they deploying these funds in this way? They want to get in front of interesting deals. They want to raise the visibility of venture backed startups. I believe most of them want to do something they feel is good for Utah's startup/tech ecosystem. If you're an entrepreneur, this is a great way to get some money, but more valuable might be the connections that come out of it. If you fail, you don't have to pay any money back. If you start killing it, you'll get a very favorable conversion when that debt turns into equity. You shouldn't take it unless you have high upfront capital needs (often building software does), real market potential, and planning on taking more money in the future. As a technical person, I believe the future's most successful entrepreneurs are lurking on mailing lists like these. They're the ones that know how to merge text files and mother boards in a way that creates tremendous value --value that businesses/people will pay a ton of money for. I really do believe that :) Hope that helps. Let me know if I got anything wrong (I'm going on very little sleep and sense that I'm rambling). Best, Gabe On Wed, Dec 17, 2014 at 12:34 PM, Daniel Fussell <[email protected]> wrote: > On 12/17/2014 09:09 AM, Tod Hansmann wrote: >> On Wed, Dec 17, 2014 at 9:02 AM, Daniel Fussell <[email protected]> wrote: >>> On 12/16/2014 02:11 PM, Gabriel Gunderson wrote: >>>> There's this: >>>> >>> https://beehivestartups.com/blog/what-convertible-note-and-how-does-it-work/ >>> >>> So they want the gains of stock with the guarantees of a bond. Sounds >>> like a great business model for the capital provider, and a hamster >>> wheel for the start-up. >>> >>> >> Uh, no. The math doesn't work that way at all. Don't get me wrong here, >> I'm happy to be critical here as I usually am on investors being greedy or >> whatnot, but they aren't taking much of any sanctions on their investment. >> They are, simply speaking, taking a cut of the valuation proportional to >> the investment weighed against that valuation. This is both reasonable as >> an investor and expected as a startup. The only way you lose in this >> situation as a startup is if you have a valuation at a low enough amount as >> to give the folks holding the other end of the note more of the company >> than you. Note that you could also be giving up more of the company to the >> other investors valuing you, so this is a situation you're already forced >> to deal with. >> >> -Tod Hansmann >> >> /* >> PLUG: http://plug.org, #utah on irc.freenode.net >> Unsubscribe: http://plug.org/mailman/options/plug >> Don't fear the penguin. >> */ >> > > I suppose there is value to both company and earnest investor, providing > for operations cost while due diligence is done. But I'll bet there are > investors with no interest in due diligence that use it to horn in on > private preferred stock early on and let someone else do the research, > or sell the bond to an earnest investor for a premium, then lather, > rinse, and repeat. > > ;-Daniel > > /* > PLUG: http://plug.org, #utah on irc.freenode.net > Unsubscribe: http://plug.org/mailman/options/plug > Don't fear the penguin. > */ /* PLUG: http://plug.org, #utah on irc.freenode.net Unsubscribe: http://plug.org/mailman/options/plug Don't fear the penguin. */
