Mary Long-Irwin of Northern Ontario Angels adds another option: “We also have some investors that have gone with the company to the bank, and the investor will co-sign an operating line of credit. The company gets a better rate, and the investor gets a percentage on a monthly basis. This is a win-win for both the investor and the company. For example, Company XYZ goes to the bank and is seeking a line of credit for $100,000. Because (for a variety of reasons) the risk may seem to be a bit high, the bank may offer this line for 10% or 12% (or even more). An investor with a long- term relationship with the bank may get the same line of credit for 2%. The company saved 10% or more and now splits that savings with the investor. The investor gets 5%, and the company gets a line of credit for 5% less than had the company gone on its own – win-win.”
4.3 Valuation This is perhaps the most fundamental, yet controversial, topic in early-stage investing: How much of the company do I get for my investment money?
Well, it depends…
It depends on the other deal terms. It depends on how badly the company needs the money. It depends on how many other potential bidders there are. Unlike the public stock market, the private stock market price is anything a willing buyer and seller agree upon through a negotiation process. Increasingly, many Angel investors don’t even try to determine the company’s valuation. They simply agree to a specified discount to the next round’s valuation in a convertible debenture. Or they agree to a valuation cap and sign a SAFE agreement – “Let someone putting more serious money into the company figure it out down the road, after they have a product, revenues and customers – any valuation we come up with now will be obsolete in a few months.” “Valuation discussions can often be contentious and put the Angel and the entrepreneur on opposite sides. This may not be a great way to start the relationship,” says Dr. Maxwell, “At the very early stage, it is very difficult to justify any valuation, and the differences between the entrepreneur’s valuation and the investor’s valuation can be substantive. Putting the discussion off to the next stage means that valuations are based on significantly more information.” What’s This Thing Worth, Anyway? You will hear all kinds of conflicting advice on this topic: “Don’t get too hung up on the valuation. The relationship between founder and Angel is far more important than a few points that may be won or lost in negotiation,” or, “Valuation is everything. It is the most fundamental aspect of the deal,” or, “I will not talk to an entrepreneur about valuations for more than five minutes. If they want to talk more than five minutes, I probably do not want to invest.”
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