Forums: Discussions for entrepreneurs and small business.

I`m putting the finishing touches on my business plan and preparing to take the next step, finding money.  I am most likely going to be pursuing angel investors for this venture but I feel that I don`t have a good exit strategy for this type of investor.  What sort of terms should I be presenting them with and what should my expectations be for their demands?

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Drink Up!

Most "professional" angels expect the company to require additional funding rounds (typically from a VC firm) which then necessitate a liquidity event such as a M&A or IPO. 

Depending upon the situation, the angel may anticipate being liquidated during the VC round or wait until the VC liquidity event. 

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Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

Well, undergoing subsequent rounds of financing does not necessarily translate into a viable exit strategy for investors in previous rounds.

VCs, for instance, don’t acquire outstanding shareholdings of investors in previous rounds. Typically, these shareholdings are watered down (diluted) in a subsequent round, which still makes sense for investors because the loss in ownership is well compensated through a dramatically increased valuation of the company. With other words, this is a way of making them some extra money, but it won’t get them out of their investment.

Have you thought about offering a stock buy back program? Under this assumption, you could do a private placement, rather than seeking funds from a VC, and offer initial investors to buy back their shares at a fixed price per share.

Of course, there are other liquidity events, such as an acquisition or merger where the other party typically has an interest in acquiring all, or at least the majority of all outstanding shares.

In any event, a potential exit strategy for a development stage company typically isn’t set in stone because the underlying fundamentals are usually still too fuzzy at this point. Investors usually know that and have their own ideas of a potential exit.

I hope this helps.




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Jackson Steiner
http://www.JacksonSteiner.com

Advanced Document Design for entrepreneurs, intermediaries, and the financial services industry.
http://www.Publications.FastVentures.com

Thanks guys for your insight, very helpful.  How detailed does the exit strategy have to be when you initially sit down with an angel for example?  I am not looking for enough capital to be able to attract a VC and the terms of the deal with a VC would probably be too drastic for me to consider seriously.

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Drink Up!

Rick,

The amount of "detail" in your exit (or liquidity) strategy would vary according to what it is. For example, if you have a "repurchase" strategy - you will need to have the details available during the process. If your liquidity plan is a sale  then a few possible "suitors" may be all the detail you could provide.

A word of caution: Since you say you aren`t looking for a VC (venture capital company) - I`d recommend that you have some offering documentation, not just a business plan. 

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Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

By offering documentation do you mean a shareholder agreement of some kind?

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Drink Up!

The "right" documentation would depend upon the type of transaction and the type of relationship you want to create by the transaction.

Send me a PM if you want to discuss specifics.

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Business Growth Masters, LLC -
Capital Catalysts for Entrepreneurs
Home of the Scalable Business Plan and QuikStart Capital Programs
http://www.bizgrowthmasters.com
info@bizgrowthmasters.com

It`s not what`s in the plan so much as what is credible and possible.

There are two normal exit strategies - the company goes public with an IPO, or you sell the business. The average deal sheet has a forced stock buyback (i.e., forced by the investors, not the management) at a multiple, but that rarely happens in the real world absent new financing because the money isn`t there.

Is you company going to be big enough to do an IPO? There haven`t been a lot of IPOs lately. It can happen, but saying it doesn`t make it so.

Are  you willing to sell the company? Are you willing to give the investors the right to sell the company out from under you, which is what they will insist on if they have any sense?

If the goal is for you to run this company as a small company for life, angel financing from anyone other than your grandma is not a great option, because they are going to want their money back, with a fat payback, fairly soon. If that means freeing you up for your next opportunity, that`s the way it goes.

Thanks for the feedback hardknocksmba for your comments.  This is a brick and mortar retail enterprise but it is built for speed and I have planned to be at 40 stores within 5 years through a franchising.  

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Drink Up!

Well, I have been following this post for a while now.

I feel that you are loosing sight of what’s far more important than a viable exit scenario. For instance, do you know how to pitch your project to investors? Do you have a PowerPoint presentation or slideshow that you can use to steer up some initial interest in your concept?

Let’s remember that investors primarily invest in people, so if you in fact are invited to a meeting with a VC or angle group, make sure you are on top of your game when it comes to pitching your business concept. If you falter during the presentation, or don’t have the answers to some of their questions, you’ll probably never get around to even presenting your business plan.

I have been to your website and it looks good. Start building on that!

RobertJ on the other hand is absolutely correct when he says that you should have a formal business plan or offering document available. Do you?

Angel investors are likely to qualify as accredited investors, so a good business plan should do the trick. So, don’t make your life more complicated than it needs to be and focus on the essentials.

An exit strategy is an important component of an investment proposal; however, just keep in mind that when it comes to development stage companies, it’s more or less educated guesswork.

For now, a potential stock buy back program or a private placement in conjunction with a potential franchise seem to be your best options. Can you give them any assurances that this is going to happen? Probably not! But what assurances you give them to begin with?

I hope this helps.


Mark



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Jackson Steiner
http://www.JacksonSteiner.com

Advanced Document Design for entrepreneurs, intermediaries, and the financial services industry.
http://www.Publications.FastVentures.com