[VICTOR V. BUBUIOC] Winning Angels: Insight Into Entrepreneurial Financing: Part 4: Structuring

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Jun 16, 2013, 10:30:17 AM6/16/13

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“The devil is in the detail” – or so they say.

Continuing with our seven part mini series, this article will pursue the topic of structuring a deal. Some angels try and avoid dealing with structure because it can be “like starting off a marriage focused on the pre-nuptial” (Tony Morris). Although this is true, structuring remains an important aspect of a successful venture.

When it comes to the structuring aspect of a deal some investors prefer no structure (irrelevant to the deal), some consider it highly important, and then we have everyone in between. So what do winners do? Research shows that all three camps have a fair share of winners. In the end all agree that the quality of the entrepreneur is more important than structuring.

Keeping in mind that investing in a venture is a business transaction, completely ignoring, or simply disregarding the structure aspect is irresponsible and likely to produce adverse results. As such, investors that find structuring irrelevant still have some form of structure in place, even if it’s limited to a single page.

Why is structuring important? Don’t parties, both investors and entrepreneurs, have the same goals? Structuring is important because, in fact, there are conflicts of interest between the two. The differences primarily deal with: control, which translates to return (both financial and non-financial), and finally the exit strategy. Trying to find a balance between gaining funding and giving up control (entrepreneur), and the correlating opposite (investor), can be an extremely delicate matter. This emphasizes the importance of having an “A-Quality Entrepreneur”. The entrepreneur is likely the one to have the most impact on the success of the venture.

Some Structuring fundamentals:

· “The rule is that you use preferred to attract capital and you use common to attract staff” (Tony Morris).
· “Ideal angel-round terms are simple, clear, and not unduly restrictive” (Ryan Schwarz)
· “Cash compensation should not require or enable the entrepreneur to his lifestyle positively or negatively” (Amis & Stevenson)
· Align interest as best as possible and limit conflicts.
· Focus on the “A-Quality Entrepreneur”
· Invest only the amount you are confortable to lose.
· Have a stop-loss mechanism in place.

Perhaps the most important fundamental is experience. The sum of the great and the not so great investments result in a fountain of experience that can be used to quickly determine important elements of the structure. If you do not yet have sufficient experience of your own, you can always partner with someone that does. This is a practical approach that can be useful far beyond the realm of investing.