Convertible debenture – This is a loan (a “debenture”) that is convertible into equity upon some trigger event, like the next round of financing. If things go badly, the investors get the assets and if things go well, the debenture converts to equity on favourable terms (for example, a 15% discount to the next round). Discount to next round – This is an equity purchase without a previously arranged valuation. Investors and founders agree to let the next round of investors make the valuation decision. This might be appropriate where the next investor is a VC with more extensive due diligence and connections. SAFE – Simple Agreement for Future Equity – This is a standardized hyper- simplified form of discount to next round that saves the cost and effort of issuing shares. The investor and founder agree to a valuation cap, sign the SAFE and transfer funds. This form of investment instrument was initiated by the successful Y Combinator (see www.ycombinator.com/documents) and has become increasingly popular with momentum Angels and incubators, particularly in the US. This deal structure has not caught on much in Canada. As Kirk Hamilton of Open Angel and VANTEC points out: “In BC, a SAFE agreement is considered debt, which makes the investment ineligible for the BC government’s 30% investment credit.” Warrants – These are options to purchase shares in the future. Sometimes they are offered as an opportunity to buy additional shares at a discount in the next round of financing. They are occasionally offered as “kickers” to enhance an offer to the investor while also giving the entrepreneur the ability to raise funds easily in the future. Angels seeking a diversified portfolio of investee companies will often see and invest in some or all of these investment deal structures over the course of a few years. “Almost all my deals are convertible debt or preferred shares – 99%. But always on entrepreneur-friendly terms. I primarily care about getting a liquidation preference – 1X to get my money back.” (Mike Cegelski) 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.”
62 A Practical Guide to Angel Investing: How to Achieve Good Returns
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