A valuation cap is something that applies to convertible notes. A convertible note is a security that is a hybrid of both debt and equity. Notes are issued in the place of priced equity, typically when a company is raising less than a million dollars and does not want to generate the legal expenses associated with a priced round.
When the company issues a larger amount of capital, the notes will have the option to “convert” into the newly issued securities at a pre-set “discount” to the price of the follow-on round. These discounts typically range from 15 to 25 percent. However, in order to provide investors with some of the protections of a priced round, they add a “cap” to the valuation. The “cap” sets the highest valuation that can be used to determine the conversion price of the notes.Read More
Due Diligence may sound like a scary process, but it really just means exercising a reasonable standard of care before making an investment decision. During the due diligence process at 1000 Angels, we get to know the companies we are considering investing in very well. And a lot of that starts with getting to know the founders.
We rely on referrals from other founders, 1000 Angels and experienced investors to help us meet founders that we can trust. If you have meet a founder for the first time and like his or her idea, make sure you do a lot of “asking around” and reference checking before making a decision. Many of the founders we have made investments in we have known for several years before actually writing a check.Read More
There are plenty of great resources on angel investing. Reviewing the 1000 Angels investor video library is a great start. But we also have some books we think you would love to read if you really want to dig deep.Read More
Calculating your expected return on a startup investment can be a complicated process, or as simple as something you can do on the back of a napkin. The simple rule of thumb is to estimate your potential return based on how much you expect the company to sell for. Most investors expect a liquidity event such as an acquisition or IPO within 5-10 years after investing. We will use our best estimate of a future acquisition to envision this scenario.Read More
One of the things that people enjoy most about early-stage investing is getting in at the ground floor of something really exciting. Rather than just analyzing PE ratios and balance sheet strength, early-stage investor are typically investing in the products and technologies of the future.
One of the other things that makes it special, is that you often get to meet, speak with, or even advise the founders that you are investing in. You’re investing in more than just a product or a patent, you’re investing in a team and a vision. You, as an early-stage investor, are literally changing the future!
There are several avenues to building an early stage portfolio. One is to invest with a fund manager, who will select the investments for you. These managers provide the service of selecting and vetting the companies in your portfolio, and in exchange they typically take a 2% annual management fee, as well as 20% of any gains realized on your portfolio.
If you want to avoid the fees, carry and capital commitments that come with fund investing, direct investing is an option. This is when you directly own the equity in the startup, rather than the fund manager owning it on your behalf. Many people enjoy making direct investments in startups for several reasons:Read More