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THE ACRONYM REFERS TO the Latin phrase quod erat demonstrandum, which translates roughly into that which has to be proven. Sometimes you see it at the end of a mathematical or philosophical proof as a statement that the matter has been proven.
The reason it is mentioned here is because the phrase appears in a useful blog entry from Bill Gurley, a general partner at a West Coast Venture firm that helped fund Twitter, Uber, Snapchat and others. The blog is entitled In Defense of the Deck.
It's worth a read. The entry presents the venture investor's view on why it is important to prepare and accompany your fund raising proposal with a convincing slide presentation that provides the Q.E.D. that the company's opportunity is significant and its plan is solid. It also mentions one scenario when you may want to avoid using a deck with a potential investor.
The argument for the deck revolves around a number or factors, First, there is value in working with your team to create a coherent presentation of your company's value proposition and plan for succeeding. It also enables entrepreneurs to present their proposition in an organized fashion that builds to a conclusion that appeals to investors. Also, decks make it possible in ways conversation cannot to present the important numerical piece of the business and its important metrics.
From Bill Gurley's perspective, the presentation deck enables entrepreneurs "to walk the listener through an argument as to why this is going to be an amazing business." A good deck and presentation "will gradually transport the listener to the desired conclusion – this will be a great investment.”
Check it out at http://abovethecrowd.com/2015/07/07/in-defense-of-the-deck/.
REFLECTIONS ON A CONVERSATION earlier today with a very knowledgeable friend, lawyer and entrepreneur. He's got an early, development stage company he is putting together and beginning to explore how best to go about fundraising. At this point he is exploring how best to present his venture to investors.
Crowdfunding was an option he wanted to explore but we quickly put that aside because of the amount of funds needed and the requirements of classical non-accredited investor crowdfunding - relatively small investments, numerous investors, a total funding limitation too small for this company, and ongoing reporting requirements. Even if you could raise enough money, would you really want scores of unaccredited investors to deal and communicate with in an early stage technology company? We both thought not.
From my perspective, this type of crowdfunding is not suited for early stage technology companies. Funding for a dry cleaning establishment perhaps, but even there I would want to explore other alternatives first.
The more interesting part of the JOBS Act that created crowdfunding for the masses was something largely overlooked by the press. Buried in the Act's provisions was an enabling amendment to Regulation D that governs private fundraising. The amendment authorized private companies to make public solicitations in exempted accredited investor fundraisings for the first time if they met a higher standard of vetting the accredited nature of their investors.
The result of this has been the proliferation of new "crowdfunding" web sites that provide a method for conducting a non-accredited investor offering but also, and more importantly, aggregate pools of fully vetted (under the new Reg D rules) accredited investors that can invest without the dollar limitations of a non-accredited crowdfunding offering. If you are looking to raise more than $1.0 million, this opens the prospect of presenting to a pool of vetted accredited investors who might invest $50,000, $100,000 or more each to give the company a small pool of more sophisticated investors with higher average net worths.
This may or may not make sense for my friend. Time and the viability of other potential fundraising pathways will tell whether this or another path makes most sense when it is time to raise serious amounts of money.
The image is from the hall of tapestries at the Vatican Museum. Copyright 2015 by Clinton Richardson.
IF YOU EVER HAVE SECOND THOUGHTS about engaging good and separate counsel when raising capital, consider the following real world case involving a biotech entrepreneur who found an experienced venture fund to finance his fledgling business.
The investor committed to provide $4.0 million for which the investor would receive 51% of the company’s stock and the right to elect two of the company’s three directors. The entrepreneur would fill the other spot on the board.
Troubles started at the closing when the investor announced that he wanted to stage his investment. Instead of putting in the $4.0 million as provided in his term sheet, the investor instead would provide $2.0 million at closing and a second $2.0 million in one year. The only requirement to receive the second $2.0 million was the passage of time.
Without viable alternatives (or independent legal counsel to advise him about risks or ways to mitigate those risks), the entrepreneur acquiesced. Twelve months later when the second $2.0 million came due, the investor had cooled to the company and refused to provide the second $2.0 million.
Notwithstanding the investor’s legally binding and unconditional funding obligation, the entrepreneur's options were limited. Cash was tight and there were no alternative investors. With the investor unwilling to fund, the company had little prospect of attracting a new investor.
Suing the investor to force funding was problematic. A lawsuit would be expensive and time consuming. Even a favorable result would come too late to save the company from financial ruin.
Not only that, the investor threatened to use its majority position on the board and as the 51% shareholder to liquidate the company if the entrepreneur tried forced it to put in the second $2.0 million. The investor had purchased a preferred security with his original investment that entitled it to take the first $2.0 million of new investment back in a liquidation before the inventor saw a penny.
Did the investor violate its contractual obligations? Absolutely.
But the investor had more on his mind than his duty to the company. He also had duties to his investors and was convinced that putting in the $2.0 million would result in losses to his investors.
The entrepreneur contributed to his own woes as well. Having no lawyer of his own at the initial fundraising and then using the investor's lawyer to advise him later, the entrepreneur missed fundamental issues that exacerbated his situation. For example, when the investor reduced his initial investment by half, the entrepreneur should have insisted that the investor take half of the stock originally promised and reduce his board representation until the deferred portion of the investment was received. He could have also negotiated for a penalties that would have made it more costly for the investor to renege on his promise to fund in one year.
Using the investor’s counsel for his company lawyer after the closing was also a mistake. Owing duties to both parties likely prevented counsel from proactively advising the entrepreneur about the risks inherent in his deal structure. When the issue did surface, counsel resigned the company account but continued to represent the investor, further complicating matters for the company and the investor.
How did it end? The entrepreneur eventually engaged qualified counsel to advise him. But the damage was done.
After much back and forth with the entrepreneur's new and independent counsel, the investor agreed to sell the entrepreneur all of the investor’s stock in the company for $1 plus a waiver of the entrepreneur’s rights as a shareholder to sue the investor for failing to provide the funding. Not having the time or money to sue the investor in any event, the entrepreneur took this settlement in hopes of raising money from new sources.
It was small comfort though. The company's prospects were badly damaged and likely funding sources, if they could be found at all, were sure to value the company below its valuation in the first round. The entrepreneur and his company were free to move forward but the cost of that freedom was high.
For more on this topic, check out the entry on Real World Conflicts in Fundraising in Richardson's Growth Company Guide 5.0 - Investors, Deal Structures, Legal Strategies at www.growco.com. Image by imagerymajestic courtesy of freedigitalphotos.net.
RECOMMENDED READING. Christina Bechhold, co-founder of Empire Angels in New York, offers some fundraising advice from the angel investors perspective in a recent Wall Street Journal article. She recommends entrepreneurs be forthcoming and transparent when they raise money noting that investors talk with one another and don't like surprises or to hear varying stories from other investors about a company's pitch.
"Fundraising is a slog. I advise first-time founders to double the timeline they budget to raise, because it will always take longer than anticipated. Seasonality—summer vacations and year-end holidays—will undoubtedly slow down response times. Product and market are evolving simultaneously, so numbers and discussions change in real time.
If you shared projections for April and it is now May, proactively send the April actuals to the investors with whom you’re actively engaged. Share an update on the partnership discussions you hoped to conclude in March but which are pushing into late spring."
Check out Christina's Three Reasons Entrepreneurs Need to Be Transparent With Potential Investors for more of her advice.
Empire Angels, a member-led, angel group of young professionals investing in early stage technology ventures. The image is courtesy of Wikipedia.org.
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