Three Keys to Escape the Bootstrap Trap

Three Keys to Escape the Bootstrap Trap

You may have been bootstrapping for a while now—using your personal resources to fund your business and hoping that eventually you will be able to break even and start paying yourself and buying the things your business really needs. 

The symptoms of being in the bootstrap trap include:

  • using personal credit cards to pay for business expenses
  • doing side gigs to earn extra money
  • wearing all the hats in your business because you can’t afford to get high-quality help
  • not being able to provide a top-quality customer experience due to lack of funding
  • not paying yourself a salary anywhere close to what a CEO should earn

Going for too long with too few resources is a leading cause of business failure. So how do you finally get off the hamster wheel of bootstrapping?  Here are the keys to get on the right path:

Realistically evaluate your options and commit to the best one for you.  

If you are in the bootstrap trap, you have three options:

1) Continue as you are and keep hoping that you finally get enough revenues to be able to do all the things you want with your business. This can work for some—if you hustle hard enough you may be able to reach that revenue goal. But if you have been trying to reach that goal for a while and you keep falling behind, it is time to acknowledge that a lack of resources is making it impossible for you to create sustainable revenue. You are in a vicious cycle!  Without upfront resources, you can’t buy what you need to create a business that generates sustainable revenue.

2) Give up on your business and get a job.

3) Bring outside resources into your business—also known as Other People’s Money (OPM). I want to be very clear about what OPM is. It is not money that you are personally liable to pay back (like a credit card, home equity line of credit, or personal loan from a family member). That kind of money keeps you in the bootstrap trap. OPM is money that is invested in your business and does not put your personal finances at risk.

If you choose option 3, you owe it to yourself to commit and do what it takes to get that funding!

If you choose to raise funding for your business, learn about all the options for doing that.

There are numerous ways to bring in outside funding for your business.  It is not necessary to be a high growth tech startup to raise funding from investors.  Be sure you understand all the options so you can choose the one that fits your business best.

Create your plan.

Spending some time up front to create a well thought out plan will save you time, effort, and regrets on your fundraising journey.  You need to customize your plan to your particular goals, projections, and values so that you don’t waste time chasing funding sources that are not a good fit for you or, even worse, get funding that requires you to sacrifice what you love the most about your business.

We want to help you get clarity on your path for escaping the bootstrap trap.  We are offering a limited number of sessions with our team members who can help you pinpoint your strategy.  To schedule a complimentary session, click here.

What could possibly go wrong? Using due diligence to make investment decisions

What could possibly go wrong? Using due diligence to make investment decisions

Due diligence, a fancy term for doing reasonable research, is a key component in the process of evaluating any investment opportunity. While there are no set rules for the due diligence process, due diligence is expected to be conducted by investors and can be a wonderful learning experience. It’s common practice for due diligence to include review of issuers’

  • Management Team
  • Financial Projections
  • Product / Service / Technology
  • Market Opportunity
  • Go-to-Market Strategy
  • Competitive Analysis

Although issuers expect potential investors to perform due diligence, the degree to which an issuer is prepared and organized enough to facilitate the process varies widely. Entrepreneurs who are launching or managing businesses and raising money simultaneously are often spread thin with little time to spare. Lucky for investors considering investments through a FINRA approved portal for Regulation Crowdfunding (Reg CF), much of the document collection and anti-fraud verification is already complete!

Among the many benefits of Reg CF raises is the transparency and ease of access to the issuer’s business documents. FINRA approved Reg CF portals like Crowdfund Mainstreet collect the issuer’s pitch deck, executive summary, financial documents, legal documents, term sheet, and projected use of proceeds and post them on the crowdfunding page along with a link to Form C —the Securities and Exchange Commission’s (SEC’s) required disclosure form.  These can all be easily reviewed at any time during the raise. 

Some investors take what is colloquially called the “spray and pray” approach to investing.

What’s more, the SEC relies on Reg CF portals to shoulder anti-fraud responsibilities in the form of background checks and securities enforcement regulatory history checks for each issuer and its officers, directors, and owners of 20% or more of the voting equity in the company. Because the portals have already done the work of document collection and background checks, potential investors in Reg CF raises have a head start in the due diligence process and are able to save time and effort. 

Because Reg CF raises have relatively low minimum investment thresholds, combined with the required checks by the portal, some investors take what is colloquially called the “spray and pray” approach to investing. They make many investments across various opportunities without performing due diligence and hope their investments that have returns do well enough to cover the losses of the other investments and, on the average, they come out on top. While the spray and pray approach is common, I recommend a more empowered approach: performing due diligence to at least a degree that reflects the risk and, even better, teaming up with friends to conduct due diligence together. Not only will you be able to share the workload, everyone will benefit from the diverse perspectives offered by various members of the team.

As the Community Manager for Angels of Main Street, I’ll be coordinating a due diligence team for Traipse: My Local Token, an issuer currently raising funds on the Crowdfund Mainstreet portal. Everyone is welcome to join regardless of interest level in this specific issuer. Everyone has something to offer and due diligence is a team sport.  Contact Amy@JennyKassan.com to be notified of upcoming meetings.  Note:  You do not need to be an Angels of Main Street member to join this due diligence group.

The Angel Capital Association 2021 Summit—is there any hope?

The Angel Capital Association 2021 Summit—is there any hope?

 

Have you ever attended a conference and felt so at home—like the attendees are really your people?  When I go to the Angel Capital Association conference, I feel exactly the opposite!  Most of the people I meet there don’t understand why anyone would be concerned about the impact of their investments beyond the impact of making the angel investors rich.  Most of the talk is bragging about that 47x exit that they got (i.e. they got a return of 47 times their original investment).  

I went ahead and applied to speak at the conference about “alternative” investment models because it is my mission to spread the word about non-extractive, sustainable ways to invest.  I was shocked when my proposal was accepted!  I decided not only to attend the panel I was on, but to attend the whole conference and try to keep an open mind.  Maybe the world of angel investing was starting to evolve?

When I looked at the agenda, I noticed that almost 20% of the sessions had the word “exit” in the title.  This, and the content of most of the sessions, confirmed that most active angel investors continue to rely on “exits” (via acquisition or IPO) to get paid.

The session I was invited to speak at was called “The Art of the Deal: Alternative Deal Structures.”  I decided to be honest about my opinion of the sacred cows of angel investing. 

Here are some excerpts of what I said:

“When we talk to angel investors about ‘alternative structures,’ there is an assumption that alternative structures are debt and that equity has to be structured using the typical angel/VC style term sheet. . .There are many ways to structure equity.”

“I wonder about the wisdom of relying on a big exit as the only way to get paid.”

“The model where you push for an exit is not appropriate for 99.9% of businesses in our country.  And that doesn’t mean those businesses are “lifestyle businesses” or not investable.  They could go huge.  Only 6% of fortune 500 are venture backed.”

“Women are less likely to found companies that are on the high growth path.  If you want to diversify your portfolio, focusing on that one structure may not be consistent with that.”

As you can imagine, my comments did not go over well.  Here is what some of the attendees said:  

“We need to keep deal structures pretty standard, especially if future institutional funding is expected.  Using the standard terms on the National Venture Capital Association’s website has been very helpful.”

“I believe the great majority of angel investors want to help grow companies to a successful exit.”

“Most angel investors want to invest in companies that will have an exit.”

“In MOST cases exit is the right path.”

“A lot of complex “creative” deal structures don’t really help . . . the reason the VC route happens over and over is because so many lawyers have a basic understanding.”

“I would argue that if the entrepreneur doesn’t want to drive to an exit, we shouldn’t have invested in the business in the first place.”

 

We did get a few supportive comments acknowledging that there is, in fact, a category of business that can be successful and grow big without having an exit.  Unfortunately, this seemed to be very much a minority view among the attendees of the conference.  My hope is that I might have planted some seeds that will bear fruit some day as more investors become increasingly open minded about investment structures that support a livable, prosperous, and sustainable world for all.

You don’t have to sell your company for your investors to exit!

You don’t have to sell your company for your investors to exit!

When you raise money from investors, many of them will want to know how they may someday get their money back out of your company.

When people invest in public companies, it is very easy to exit from one investment to another—they just tell their online broker to sell Apple and buy Google.  

But with investments in private companies, the exit may not be so easy.  If you offer debt to investors, the way they will exit someday is spelled out in your promissory note.  At some point, you will pay your investors back their initial investment (principal) plus interest.

What if you offer an equity investment, however?  In the venture capital model, used for high growth tech startups, the exit from an equity investment usually happens when the company is acquired by another larger company.  But what if you don’t want to focus all your energy on that kind of exit?  When you know your investors are expecting you to sell your company to the highest bidder as quickly as possible, you may be forced to do things that are not in alignment with your goals, values, and how you want to live your life.

What if your investors could exit without you having to sell your company?  Well, they can!  There are a few ways this can happen, but in this article, I will focus on redemptions.  A redemption is when you buy equity back from your investors.  You can build this into your investment terms right from the start so that both you and your investors are clear on how they may someday exit.

Your investor’s ability to redeem his or her stock will depend on the exact language you put in your legal documents.  Our clients usually offer the ability for their investors to request a redemption at a certain predetermined price.  If your company is unable to honor the request due to insufficient cash for operations and reserves, you can delay or refuse the redemption or can pay the redemption in the form of a promissory note.  You can also offer a “mandatory redemption right” that requires the company to redeem the equity whenever the investor wants (this right often doesn’t kick in for several years after the initial investment).  Keep in mind though that there is really no such thing as a truly mandatory redemption right.  If your company does not have enough cash to meet its obligations to its creditors, it cannot legally redeem investor equity.

To learn more about all the ways that your investors can exit without you having to sell your company, consider joining our Capital on Your Terms Community—this is a great way to get literate about fundraising and make sure you know all your options for raising money on terms that will be sustainable for you and your business.

Should you provide anti-dilution protection for your equity investors?

Should you provide anti-dilution protection for your equity investors?

Anti-dilution protection is a set of provisions that you can include in your governing document (articles or certificate of incorporation) that are designed to protect equity investors in the case of a reduction in the price of your stock.

Before we talk about anti-dilution protection, we first need to talk about conversion rights.  Conversion rights are the right of your preferred investors to convert their preferred stock to common stock.  Why would they want to do this?  When the company is sold, the buyer generally will want to buy common stock, so at that time, preferred shareholders would convert to common in order to receive their share of the proceeds of the sale of the company.

When you offer preferred stock to investors, they often come with the right to convert the preferred stock to common stock on a 1:1 basis.  So, if an investor has 100,000 shares of preferred stock, they can convert those shares to 100,000 shares of common stock.

Anti-dilution protection is a mechanism that changes that ratio in the case of a decrease in the value of the preferred stock.

There are different formulas that can be used to adjust the ratio.  A very commonly used formula is called the Weighted Average method.  The following formula is used to provide an adjusted number of shares that one share of preferred stock converts into, with the idea that one share of preferred stock will convert into more than one share of common stock as a way to protect the early investors from losing all of the value of their initial investment:

CP2 = CP1 x (A+B) / (A+C)

Where:

CP2    =     Conversion price immediately after new issue

CP1    =     Conversion price immediately before new issue

A        =     Number of shares of common stock outstanding immediately before new issue

B        =     Total consideration received by company with respect to new issue divided by CP1

C        =     Number of new shares of stock issued

Here is an example to illustrate how this works:

When you first start your company, you issue 2 million common shares to the founders.  Then, let’s say you raise $500,000 from investors by offering preferred stock at $1 per share.  One year later, you raise $1,000,000 at $0.80 per share (meaning you sell 1,250,000 shares).

CP1 = $1

A = 2,000,000

B = $1,000,000/$1 = $1,000,000

C = 1,250,000

So, the new conversion price =

1 x (2,000,000 + 1,000,000)/(2,000,000 + 1,250,000) =

1 x (3,000,000/3,250,000) = $0.92

This means that the first preferred stock investors now convert into 1.09 shares of common stock ($1.0 /$0.92 = 1.09).

So, if the company is sold and those investors convert into common, they will get a larger share of the total proceeds from the sale than they would have if there were no anti-dilution protections.

Should you offer this protection to your preferred equity investors?

If you think it is likely that you may sell your company someday and the proceeds from the sale will be an important component of how your investors will be compensated, anti-dilution protection is a nice way to provide some protection to your early investors.  More sophisticated investors might insist on it.

On the other hand, these provisions can be rather complicated and require you to keep track of conversion ratios that might change if you raise more than one round of equity funding.  If you don’t foresee a sale of your company, it could make more sense to leave out provisions related to conversion of preferred stock to common altogether.

If you would like to become an expert on investment terms and other topics related to fundraising for your business, join our Capital on Your Terms Community!  For details, click here: https://www.jennykassan.com/capital-on-your-terms-community/

We Want You…

We Want You…

…to join Angels of Main Street!

It should come as no surprise that the power of our voices grows when we control where money flows. This simple fact is the reason that Angels of Main Street, an investment community that anyone can join, is working to move investment dollars to the people and communities that have been overlooked by the mainstream small business funding ecosystem. 

What makes us think that collectively we can shift massive amounts of money to women and BIPOC led companies? Believe it or not, 2020 was a game-changing year for Investment Crowdfunding, the most scalable alternative we have to venture capital. Investment Crowdfunding attracted $239.4 million in investments in 2020, up from $134.8 million in 2019. And it is predicted that the crowdfunders will invest at least $500 million in 2021.

While it is true that these numbers pale in comparison to investments made by venture capital firms in 2020 ($156.2 billion, up from $138.1 billion in 2019), venture capital funding went to only 11,000 companies with the average investment exceeding $14 million.

Even though the very wealthy are investing ever increasing sums in search of their unicorns, they are not expanding significantly into diverse founders and industries. This will be up to us.

Remember, virtually every adult can participate in Investment Crowdfunding while only about 8% of us are eligible to invest in a venture capital fund. If only 1% of the wealth held in stocks, savings, and retirement accounts were shifted from big banks and Wall Street, we would have a funding ecosystem worth hundreds of billions of dollars. Think of all the inequities we could reverse by simply democratizing what, and who, gets funding.

Angels of Main Street is the place to go if you are ready to dip a toe into investing directly in businesses you love.  We provide an educational curriculum and support our diverse community of investors to work together to make their investments count.

If you have money invested on Wall Street (which is where 99.9% of regular folks’ investments are), your money is not doing anything to contribute to the productive economy.  We would love to help you shift just a small percentage of your investment dollars to businesses that are making the world a better place, innovating, and creating community wealth.

We hope you will consider joining us!  Please click here to learn more and join now.