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Beware of Being Sold the Dream

Beware of Being Sold the Dream. Pessimists: Totally risk averse – never start anything Optimists: Positive thinking required to found a business – temper it with realism and develop ability to recognize and deal with killer threats. Investor Concerns . C orporate structure:

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Beware of Being Sold the Dream

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  1. Beware of Being Sold the Dream Pessimists: Totally risk averse – never start anything Optimists: Positive thinking required to found a business – temper it with realism and develop ability to recognize and deal with killer threats

  2. Investor Concerns Corporate structure: • Closely held – minority shareholder • Closely held – minority shareholder on board • Closely held – controlling share • Public corporation – minority shareholder

  3. Investor Concerns Closely held corporation: • A minority shareholder can be frozen out of decision making even if on the board • Plan on being a passive participant • Must have great confidence in the management team and a clear understanding and acceptance of the business plan

  4. Investor Concerns Due diligence: • Technical due diligence • Financial considerations • Management considerations • Business plan • Role of NDAs • Financial expectations • Exit strategies • Ethics and angels

  5. Investor Concerns NDAs and due diligence: • Preserve corporate intellectual property and plans from the competition • Range from the simple and straightforward to the patently silly • As a shareholder, honor NDAs fully • NDAs in alt.space are usually excessive because the players overvalue their concept • PowerPoint vehicles are cheap and common – the skills to create them are expensive and rare

  6. Investor Concerns Financial expectations and risk: • Intend to make money from dividends or from capital gains on selling the stock • Paper profits may be illusory • Opportunity costs must be considered • Most startups fail

  7. Investor Concerns Exit strategies and due diligence: • Be acquired by a larger entity for cash or stock trade (or cash out after a successful IPO) • Marketability of stock in a closely held corporation is limited • IRS typically discounts book value by 50-75%

  8. Investor Concerns Ethics, angels, and due diligence: • Honesty must prevail on both sides • No statements should be taken at face value • Angels often invest for reasons other than strictly financial (such as the coolness factor) • Confidence that the management team can either acquire or grow the necessary skills is an absolute prerequisite to investing

  9. Investor Concerns Stereotypical Alt.Space startup – “The Mojave crowd”: • Several engineers with concept • Little or no business track record • What is the market? • What is the plan? • Capital – family, friends, and fools • No current personnel costs, grandiose projections • Functions like university dept with C corp structure

  10. Investor Concerns Common engineering misconception: • R&D man years inconstant with team size • Doubling team does not cut R&D time in half • If it did, 9 women could make a baby in one month

  11. Investor Concerns Successful evolutionary track: • Closely held – family, friends, and fools • Angels – the coolness factor • VCs play the numbers game (and act like loan sharks) • Second round offering memorandum • Acquired by biggie (Northrup buys Scaled) • IPO – public gets in and founders cash out • Little upstart is now a biggie (Orbital Sciences)

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