Sometimes, I read posts about venture capital and investments and at some point, my eyes just glaze over. It’s a lot better (there was one time when I’d groan audibly). I suspect it’s the same for a lot of people in Africa. So many of us screaming for “funding” but would we recognize a good deal if we saw it?
Ok. So here’s the idea for this thread: if you have a term you’ve seen or something you’re not sure about, put it here and we’ll get someone to explain it. Or you can explain it if you know what it means.
Liquidation preferences simply state the order in which investors in a business will get their money out (and how much). This is often done to limit the investors loss when they invest in your business in case things don’t go well.
Most investors (especially in a priced equity round) will ask for 1x or 2x liquidation preference. Here is how this breaks down in a hypothetical scenario.
Let’s say John Investments invested 1m in your company at a 2x liquidation preference at a 3 million valuation post the investment. This means they own 33% of the business. Two years later things are not going well and Grey Cold Liabilities decides to buy the company for 2.5million dollars. Normally, the founders should get 67% of the 2.5 million while 33% will go to the investor. However because of the liquidation preference there John Investments will first collect their liquidation preference of 2 million dollars and all the founders will now share 500k depending on their amount of shares.
I think @iaboyeji was spot on.
I remember finding a lot of useful information on investment on Brad Feld’s blog.
See this post on liquidation preference
Convertible debt is basically a loan where your company’s shares (instead of cash) are an acceptable repayment. It is very often used in the early days when it is hard to value the company in a fully priced equity round. So you just do a convertible debt note with a “cap” which is a shot in the dark guess about how big/small the company could get.
Example - John Investments gives you 1m in convertible debt with a cap of 5m. If in your next round which is a fully priced equity round your company is worth 7 million, he will still get 16% of the company. If it is worth 4 million. He will own 20% of the company.
Really good book to read about fundraising is Venture Deals (Brad Feld and Jason Mandelson) other interestingly great resource for basic understanding is Khan Academy videos.
Understanding VC/terms etc is quite simple only requires desire and reading! I think the hardest part of fundraising/investments - that is Impossible to learn without experience - is the psychological games you might have to play with some (read majority of) investors to close a round! creating FOMO etc
@iaboyeji any insights on good strategy (African/Nigeria context).
" Typically, a hot company might offer a handful of well-respected investors a chance to invest at, say, an $8 million cap before Demo Day, with an eye to doubling that valuation for those who invest after the big event. The idea is to create a little buzz and help convince others who might be on the fence to hurry up and make a decision before it’s too late. “Almost every smart founder does that,” Craig explains…more
You will probably not be thrilled to hear this but basically John investments takes everything and writes down the balance as a loss. Founder gets nothing.
yep I meant to put a link to that - could ask fear of missing on what exactly?