June 5, 2007

Common Investment Terms

Intellectual Property: Set of laws, which provide for certain rights to intangible products of the mind. Each right is defined and regulated by a separate branch of the law. The main branches are Copyright Law, Patent Law, Trade Secret Law, Trademark Law, and Semiconductor Chip Protection Law.

Founders Stock: Equity ownership given to the investor to compensate the investor for taking on the risks of the investment.

Post-financing Valuation: The estimated value of the company just after financing. Calculated as either: (a) the product of the total number of shares outstanding and the price per share of the financing, or (b) the amount invested divided by the percentage of the company acquired.

Cramdown: A financing at a significantly lower valuation than prior rounds that will be highly dilutive to prior shareholders.

Syndication: Financing provided by an association of individuals or companies formed to invest in an enterprise.

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An “A” Team Over an “A” Plan?

Many of you have heard it is better to invest in an “A” team and a “B” idea than an “A” idea and a “B” team. Obviously, it is important to have a management team that can execute. However, has there been an instance when you have invested in an idea with the hopes the management team could execute?

For example, an early stage company with a killer idea has an incomplete management team. The company is looking to hire more people, but they don’t have a complete team. What would you do? Would you write off the company?

As an investor, you could provide valuable insight and guidance to helping fill in these management team gaps. Bill Payne, angel investor and industry expert, said some investors are willing to help the company in as much as possible. Bill explains, “Such investors will understand the problems of growing a company in your business segment and have many contacts in the industry to assist in completing the management team, as well as finding partners and customers.”

Be careful to not overlook companies who need help finding the right management team. You could be the reason a “B” team becomes an “A” team.