Venture Financing:

Step-by-step Guide

VC Deal Structure Considerations

 

 

By Venture Planning Associates. Used by permission

.

6 Critical Deal Structure Considerations

  1. You contribute 20%.
    Let's say you're looking for $1,000,000. If your company is a startup (the most difficult to fund), in investor will expect you to contribute 20% of that amount, in terms of energy, efforts and cash.

  2. Value of investment dollars.
    An individual investing $1,000,000 in your project will have had to earn $2,000,000 in pre-tax dollars in order to make the investment amount available to you.

  3. Competition for investment capital.
    Financiers have many opportunities to invest their money. At any given time, real estate, the stock market, and other ventures will be vying for their attention and capital. If you were the investor, you would most likely be looking for the most attractive deal, offering the best return, balanced against the level of risk involved.

  4. Opportunity cost.
    In addition to the actual investment, investors look at the opportunity cost. Could they have tied up their money in a safer or more profitable investment?

  5. Early investor return of capital.
    All deals should be structured so that investors get a return on capital ASAP! They want to be assured that they will get the money they invest back before you get your new Mercedes.

  6. Keeping control.
    It's not uncommon for a major impasse to occur when the entrepreneur is faced with the fact that investors want a larger portion of the company in return for their investment than the entrepreneur is willing to give.

Some Additional Considerations

It can be a shock and a deal breaker for the less sophisticated venturepreneur who is not prepared for this. Making the deal structure an integral part of the business plan serves as advance warning that the entrepreneur knows the investment value of the business.

 

- More than stock. In addition to a portion of the company's stock, some investors will also want to participate in the financial management, marketing or other vital areas of your company. Entrepreneurs should welcome the involvement of a professional with entrepreneurial experience to assist them.

- Tax and legal considerations including state securities laws. When forming your company, study the benefits and drawbacks of the different types of company structure. Your CPA can assist you by explaining the differences between LLC (Limited Liability Company), S Corp., Sub S Corp., and C Corp.