Gaining Capital without Losing Control

From Forbes

A nice quick read from Jim Casparie, a founding principal of Angel Strategies (the first national organization for angel investors) about convertible notes.

As discussed, this is a great way for newish companies, which need an infusion of capital, to raise funds without having to prove that your growth will actually occur. An investor may be willing to lend money, with a belief in some upside. In the meantime you are paying them are regular debt return in interest. But at their option (in the case of good performance or when a venture capitalist is coming on board) to convert their investment to equity at a favorable price. In effect, you can price the conversion to get the maximum at the conversion date, say in two years when things are singing along! In the meantime the note should have an interest rate below what you would normally pay without this option.

Your CFO should be aware of these types of options as you approach the market for funds.

Angels Spread Risk as well as Wings

Angel investors have become more conservative over the past couple of years, as reflected by the survey released recently by the Center for Venture Research at the University of New Hampshire's Whittemore School of Business and Economics. The survey reveals several concerns reflected in the data based on 2007 numbers. Potential borrowers should be aware of these trends.

The Center notes several figures of concern.

• Total investments made reached $26.0 billion, a mere 1.8% increase over 2006.
• Entrepreneurial firms receiving funding grew 12%, and the number of active investors increased 10.3%, indicating a smaller average deal size - probably an indication that investors were seeking to spread their risk further.
• Software, Healthcare, and Biotech netted 58% of total dollars invested.
• The Yield Rate, that is the number of proposals that were funded by angels, declined from 23% in 2005 to 14% in 2007, further reflecting a tightening market.

If you are considering approaching the angel market for funding, keep these trends in mind and have a full read of this study for more information.