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by Faisal Hoque
founder of:
If you are going to build a
company with outside
capital, one of the most
critical decisions y...
Why you should and shouldn’t raise capital for your
business—that's a topic for a different time—irrespective
of the path,...
Funding can actually kill your venture, especially
when there is a major disconnect between you and your
investor.

The  d...
Most funding structures in
companies are done either through
"preferred shares" or through
"convertible debt" structures, ...
Common stockholders are on the
bottom of the priority ladder.
In the event of liquidation, common
shareholders have rights...
Preferred stockholders have a
higher claim on the assets and
earnings than common stock.
Preferred stock generally has a
d...
Convertible debt (usually with high
interest) is a loan that can be
converted into equity while the
initial debt accumulat...
Often an entrepreneur's focus is on
valuation rather than focusing on the
investment structure.
Frequently, the thinking i...
These structures create a
misaligned incentive model.
A fire sale and/or a bankruptcy
can often be in the interest of
debt...
Due to the structure, the company's
strategy, execution, and long-term
prospects are often compromised.
The BOD members re...
In most cases, the investors (whether it's
a VC or an angel) know less about the
business than the entrepreneur. They
may ...
They often place the greatest
emphasis on financial analysis
versus operational capabilities.
While the financial details ...
Vinod Khosla the famed
founder of Khosla
Ventures, at a
TechCrunch event said
that 70% to 80% of VCs
add negative value.
A...
For other types of investors, such
as high net worth investors,
family offices, and private equity,
similar conclusions ab...
In many cases, given the structure of
the funding, it is hard to avoid
investor demands.
  
Their advice comes with their ...
Consider the VC fund structure: a
venture fund has a life cycle. This
short life cycle for venture funds
has negative cons...
Venture funds need their investments
to pay off within the fund's life span,
which is typically between six and
seven year...
Their ideal scenario is one in
which they sell the company for a
lot of money, or go public within
the fund's lifetime.
Most investors won't look favorably
on funding companies that take
years of research.
It's not that they are not intereste...
Most VCs tend to invest
in business cycles and
trends. We have seen
how investors and VCs
acted during the dot
com bubble....
Investors—Your Travelling Companion?
The investors you surround yourself with make the
difference between failure and succ...
Shadoka’s  por.olio  of  offerings  enables  
entrepreneurship,  growth,  and  social  
impact.  Our  customers  and  partn...
About Me
Founder  of  Shadoka  and  other  
companies.  Shadoka  enables  
entrepreneurship,  growth,  and  social  
impac...
What Every Entrepreneur Should Know Before Taking Any Outside Investment
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What Every Entrepreneur Should Know Before Taking Any Outside Investment

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The Hard Truths About Seeking Outside Investment. If you are going to build a company with outside capital, one of the most critical decisions you will make is who will be your investor.

While there are numerous arguments for why you should and shouldn’t raise capital for your business—that’s a topic for a different time—irrespective of the path, every entrepreneur should know some fundamental realities of funding structure before accepting any funding whatsoever.

Funding can actually kill your venture, especially when there is a major disconnect between you and your investor. The disconnect can occur in three major categories.

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What Every Entrepreneur Should Know Before Taking Any Outside Investment

  1. 1. by Faisal Hoque founder of: If you are going to build a company with outside capital, one of the most critical decisions you will make is who will be your investor. What Every Entrepreneur Should Know Before Taking Any Outside Investment [Man  with  piggy  bank:  Kues  via  Shu6erstock]
  2. 2. Why you should and shouldn’t raise capital for your business—that's a topic for a different time—irrespective of the path, Every entrepreneur should know some fundamental realities of funding structure before accepting any funding whatsoever.
  3. 3. Funding can actually kill your venture, especially when there is a major disconnect between you and your investor. The  disconnect can occur in three major categories:
  4. 4. Most funding structures in companies are done either through "preferred shares" or through "convertible debt" structures, while entrepreneurs and employees usually hold common stock. Misaligned Structure
  5. 5. Common stockholders are on the bottom of the priority ladder. In the event of liquidation, common shareholders have rights to a company's assets only after preferred shareholders and other debt holders have been paid in full.
  6. 6. Preferred stockholders have a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders.
  7. 7. Convertible debt (usually with high interest) is a loan that can be converted into equity while the initial debt accumulates interest. Convertible debt is like getting a loan from a bank, but the debt investor can usually call the loan along with the accumulated interest without converting to equity.
  8. 8. Often an entrepreneur's focus is on valuation rather than focusing on the investment structure. Frequently, the thinking is that high valuation gives lesser control of the company to the investor. In reality, it is often the funding structure rather than the valuation that gives you more or less control.
  9. 9. These structures create a misaligned incentive model. A fire sale and/or a bankruptcy can often be in the interest of debtors or preferred shareholders, while it is harmful to the common shareholders.
  10. 10. Due to the structure, the company's strategy, execution, and long-term prospects are often compromised. The BOD members representing the preferred shareholders or the debt holders, despite their fiduciary responsibility toward all shareholders, are likely to vote in favor of their own interests.
  11. 11. In most cases, the investors (whether it's a VC or an angel) know less about the business than the entrepreneur. They may have limited day-to-day experience in running a venture. And they may not know the people, customers, partners, and the markets as well as the entrepreneur. Misaligned Skills
  12. 12. They often place the greatest emphasis on financial analysis versus operational capabilities. While the financial details are crucial, they do not contain enough forward-looking information to understand, track, and govern the venture performance of today's ever-changing market.
  13. 13. Vinod Khosla the famed founder of Khosla Ventures, at a TechCrunch event said that 70% to 80% of VCs add negative value. According to him, most VCs "haven't done shit" to know what to tell startups going through difficult times.
  14. 14. For other types of investors, such as high net worth investors, family offices, and private equity, similar conclusions about their success could be drawn.
  15. 15. In many cases, given the structure of the funding, it is hard to avoid investor demands.   Their advice comes with their biases, and they often act like a dominant boss instead of a valued partner.
  16. 16. Consider the VC fund structure: a venture fund has a life cycle. This short life cycle for venture funds has negative consequences for innovation, particularly for innovation that focuses on solving complex problems. Misaligned Timeline
  17. 17. Venture funds need their investments to pay off within the fund's life span, which is typically between six and seven years. Often, they look for investments that can generate revenues in two to four years and break even soon after.
  18. 18. Their ideal scenario is one in which they sell the company for a lot of money, or go public within the fund's lifetime.
  19. 19. Most investors won't look favorably on funding companies that take years of research. It's not that they are not interested in innovation. Most won't fund innovation that takes time.
  20. 20. Most VCs tend to invest in business cycles and trends. We have seen how investors and VCs acted during the dot com bubble. One could argue that we may be seeing the same mentality around social media.
  21. 21. Investors—Your Travelling Companion? The investors you surround yourself with make the difference between failure and success. It's important to be with people who believe in and support you for the long haul.
  22. 22. Shadoka’s  por.olio  of  offerings  enables   entrepreneurship,  growth,  and  social   impact.  Our  customers  and  partners   aspire  to  create  sustainable  value.  They   are  focused  on  repeatable  and   measurable  impact.  We  enable  their   aspiraDons. We  bring  together  the  management   frameworks,  digital  pla.orms,  and   thought  leadership  for: •  Evalua@on,  execu@on,  and   monitoring  of  programs •  Scaling  sales,  revenue,  and   profitability •  Crea@on  and  management  of  digital   communi@es  and  marketplaces AboutSHADOKA shadoka.com Follow us @shadokaventures
  23. 23. About Me Founder  of  Shadoka  and  other   companies.  Shadoka  enables   entrepreneurship,  growth,  and  social   impact.   Formerly  of  GE  and  other  global  brands.   Author  of  several  books,  including   Everything  Connects  –  How  to   Transform  and  Lead  in  the  Age  of   Crea:vity,  Innova:on  and  Sustainability   (McGraw  Hill,  2014)  and  Survive  to   Thrive  –  27  Prac:ces  of  Resilient   Entrepreneurs,  Innovators,  And  Leaders   (Mo@va@onal  Press,  2015). Follow  me  @faisal_hoque. Faisalhoque.com  |  shadoka.com

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