Part 3 of the Tale of Yellow Shoes: How an Angel Investor Can Help You

Part 3 of the Tale of Yellow Shoes: How an Angel Investor Can Help You

For the last couple of weeks, I’ve been writing about Yellow Shoes, the founder of a very promising start-up which was funded while still in concept stage by a couple of angel investors… who proceeded to take over control of the company in the process. By now, you may be wondering why anyone would want to take on angel investors who just want to take over your company. And true, it may be daunting looking over a term sheet which demands a 45% stake in your company. Still, taking on an angel investor is still be the best choice for many founders. Even in the case of Yellow Shoes who lost control of her company, the angel investors brought a lot of value to the table which translated into major assets which got her company off the ground very quickly. Mostly obviously, the angels brought money which allowed Yellow Shoes’ company to grow at a pace which quite frankly would not have been possible otherwise. Remember 100% of a company that’s not growing, is 100% of a very small pie that’s probably not be going anywhere. Taking an outside investor is tradeoff to get necessary capital, and many successful companies would have been spinning their wheels otherwise. Yellow Shoes’ startup had very high customer acquisition costs, and without that quick infusion of cash, getting the business up and running and building momentum would have been highly unlikely. 40ish% of a growing pie is still a lot better than 100% of nothing. Moreover, a reputable angel can bring a lot more than money to the table. Advice, mentorship, and contacts...
Part 2 of the Tale of Yellow Shoes: Increasing Your Negotiation Leverage

Part 2 of the Tale of Yellow Shoes: Increasing Your Negotiation Leverage

Did You Miss Part 1 of the Tale of Yellow Shoes: When To Take Money? Last week, I started telling the cautionary Tale of Yellow Shoes, the founder of a very promising start-up which was funded while still in concept stage by a couple of angel investors… who proceeded to take over control of the company in the process. Yellow Shoes had confessed to me that were she to do it over again, she and her partner would have waited to take on angel investors. You may have been wondering why. Well, you see, if Yellow Shoes and her partner had waited before they had accepted money, they may have been in a better position to negotiate with their angels, and maybe (just maybe!), they might have been able to keep control of their company. The reason is that if they had waited and managed a few months of operations on their own, Yellow Shoes and her partner may have been able to show their potential investors a customer or two or some customer interest that would show some proof that their business would be viable and that is key. The more proof of your business’ viability, the better off you are in negotiating with your soon-to-be investors. And that makes sense. The more likely that your business is viable, the lower the risk for an investor, and of course, the better the chances the he or she will make money on an investment in your business. What shows proof of viability? The best proof of viability hands-down is an actual customer, preferably multiple customers. Real people willing to...
Taking Money:  When Is It the Right Time? (Or the Tale of Yellow Shoes)

Taking Money: When Is It the Right Time? (Or the Tale of Yellow Shoes)

I was speaking to the co-founder of a very promising start-up recently. Her company has been getting “buzz” and good press and it’s adding customers daily. I’m sure to the envy of many entrepreneurs, it has been well-funded by a couple of rather high-profile angel investors. She even had fabulous yellow stiletto heels. (Really, they were awesome!) Why, you may ask, would she not be over the moon? Well, Yellow Shoes confessed somewhat guiltily, “I wish we hadn’t taken money so soon!” As it turned out, unlike many founders, Yellow Shoes and her partner had not actually pitched their start-up to investors for funding. Through social circles, a very early-stage version of their enterprise had come to the attention of an investor who expressed strong interest in their idea and ultimately funded them sans pitch, pitch deck, or even an executive summary. For many founders sweating over every line and graphic in their deck, this would seem to be a dream come true. So what could possibly be the problem? Well, in taking early money, Yellow Shoes and her partner had lost control of their company. Literally. Between the two angels who had funded the company, their angels took over fifty percent of the company and ran it, no bones about it. “I just think if we’d held out another three months, we wouldn’t have had to give away quite so much…” She’s right. One of the most common questions I am asked by founders is: How much of my company am I going to have to give up? Well, duh! How much of My Company AM I Going...