Structuring

It’s important to structure a deal that is favorable for both parties involved.  This process can be broken down into 3 facets: keep the deal simple, align interests of both the investors and the founders, and determine the best deal to implement moving forward.

Keeping a deal simple creates room for creativity and flexibility later on.  Simple deals also increase the likelihood of gaining and investment.  A great goal is limiting the terms of the agreement to one page Making the interests of both the investors and the entrepreneur match is critical to keeping it simple.  If a party feels slighted, it will increase the likelihood that the deal becomes more complicated.  (Amis & Stevenson, 2001, p. 201-203).
    
Savvy investors will recognize the difference between serial vs lifestyle entrepreneurs.  A serial entrepreneur is one that has several ideas for different startups and has a history of doing so.  They may simultaneously have other deals playing out, unrelated to the current investment.  These are entrepreneurs are idea generators, and are great for facilitating the groundbreaking and growth at the beginning.  But the serial entrepreneur is typically not in for the long haul and establishing final success, so investing in one makes timing an important variable.  They are ideal targets based on historical success, but because of outside interests, they can be difficult to invest with.  On the other hand, the lifestyle entrepreneur is a reliable target due to their vested interest in the company.  However, most venture capitalists avoid the lifestyle entrepreneur because they tend to live off the income of the business and fail to reinvest for growth.  In general, this information will help guide the both the investor and entrepreneur in choosing an exit strategy that makes sense given the scenario.  As the entrepreneur, it is your job to recognize whether they find interest in the long haul, or if they are simply out to make a quick buck.

Considering the type of investment is also important in structuring the deal.  Is the entrepreneur offering common stock, preferred stock, or convertible notes?  Each scenario has its advantages and disadvantages, but Angel’s tend to lean towards preferred stock due to the leverage it creates within the operation of the business. Preferred stock also gets paid out first in the event that the business becomes insolvent, but it can hinder future rounds of investors should the need for additional funding arise.  Convertible notes are another popular option as they allow the investor to gain a percentage of the company before a valuation is established.  A convertible note is short term debt that converts into equity if the business becomes a success.  It’s a best-case scenario for the investor as it allows them to get a great deal on equity if things pan out, and possibly recover their money if things do not.  This is not a popular option among experienced entrepreneurs for obvious reasons.

In the end, the best deals are made when both parties feel that the deal treats them fairly, and in a good business relationship, this is a merit both parties should aim to achieve.