ENT 640 – Structuring

The Importance of Structuring

As I continue reading Winning Angels – the 7 fundamentals of early stage investing by David Amis and Howard Stevenson, I realize what a novice I am to investing and investments.  In the last section, the book was on valuing the idea or business.  This week’s reading was on structuring.  The importance of structure really depends on the investor.  Some investors play an active role in the structure of the deal actively leading the negotiation, some do not play an active part but just don’t invest if they don’t like the terms.  On the flip side, some investors feel that the structure is irrelevant.  They accept that the deal will either be a success or a failure.

There are three fundamental structures common to investing.  These include: common Stock, preferred convertible with various terms, and convertible note with various terms. With each of these structures, you should look at the exit possibility, protection, and possible outcomes.

Common Stock is the easiest structure.  This structure is used for family and friends.  The book also says it is also used by fools.  The structure allows the entrepreneur to issue stock according to the valuation agreed upon by the investor. An advantage to the use of common stock is the timeliness and the lack of additional risk.  Some of the disadvantages are the possibility of loss of all your money, the entrepreneur could sell their shares to another person,  or the company could completely fail leaving the investor with their shareholder’s equity position.  This structure is great for the investor that is looking for easy and quick.  It is suggested that the investor get the pre-emptive and tag-along rights.    

Preferred Convertible is just that, preferred by some investors. This structure is not as simple as common.  It requires more interaction with the entrepreneur.  The preferred share structure offers more protection to the investor.  The entrepreneur may expect more consideration for using this structure. 

Convertible Notes with various terms are being used more often.  Most of the risk is taken away with this structure.  Convertible notes are debt instruments that allow the investor  to turn their investment into stock.  This structure can be more complicated and more time consuming.

A winning angel may use a variety of structures for different deals depending on the complexity, the amount of capital requested,  the time-frame, and the trust they have in the entrepreneur.   As a novice, I will continue to read Winning Angels.  

Amis, David, and Howard H. Stevenson. Winning Angels: the Seven Fundamentals of Early-Stage Investing. Financial Times Prentice Hall, 2001.

5 thoughts on “ENT 640 – Structuring

  1. Like you, I am new to the investing world. I have found that this book has helped to clarify many of the misguided notions that I held. Things actually seem a whole lot simpler than I expected. Still, it is great to be able to read about all the terminology and the nitty gritty details of the deal structures. I have particularly enjoyed the interview portions with the angel investors. Hearing about how this plays out in a real situation has been phenomenal. It has also been very eye-opening to see how completely different the approaches can be, depending on the preferences of the individual investors. It has given me a lot to think about when considering which lenses to put in front of my own potential projects.

    Liked by 1 person

    1. This book has been informative on many levels. What I find most encouraging as an entrepreneur is the fact that investors like an entrepreneur that they trust. I think one of my main attributes is being trustworthy. Thank you for your reply to my post.
      Tina

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  2. Fantastic post, as always! I was also very surprised to learn that some investors to not participate in the negotiation process and aren’t concerned with the structures of deals, especially when the structure impacts the level of risk and return on investment.

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  3. Tina, great job breaking down the fundamentals of structure! I too realized how much of a novice I was to investing as well. I think it was great that the program included this book because now we can think more like investors, and thus be able to appeal to them more and bring more complete and holistic deals to the table, while being able to back up our reasoning on the decisions we have made. I hope that I can find more literature to explore investing.

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