You and your new partner have successfully built a prototype of your personal tax product and have attracted the attention of investors. You have identified that you need to raise between $500k and $1 million to build out your development team and start early marketing efforts to start testing if you have product market fit. Through your connections, you have raised the interest of some investors. After presenting your idea to several, you have early deal terms from 4 different investors that you and your partner need to evaluate.
Two of the deals are proposing to invest $20-25 million in your business and are being led by traditional venture capital firms. The other two deals are from angel investors and are in line with your original ask of $500k-$1M. You have determined that, all things being equal, you like all 4 investors and think they can add value. Your decision at this point is going to be based purely on the numbers.
Here are the deals:
Deal #1 - VC:
Investment: Pre-Money Valuation: Stock Option Pool: Liquidation Preference:
Deal #2 - VC:
Investment: Pre-Money Valuation: Stock Option Pool Liquidation Preference:
Deal 3 – Angel:
Investment Pre-Money Valuation Stock Options Pool: Liquidation Preference
Deal 4 – Angel:
Investment
Pre-Money Valuation Stock Options Pool: Liquidation Preference:
$20 million
$40 million
25% taken from founder’s equity 1x fully participating
$25 million
$35 million
20% taken from founders equity 1x fully-participating
$750,000
$1,250,000
20% taken from founders equity 1x non-participating
$1,000,000
$2,000,000
25% taken from founders equity 1x non-participating
1. You have 2 very different types of deals from 4 different investors. Should you take more money than you originally thought and pursue the two venture capital deals, or should you focus on the two angel deals that are closer to your original ask of $500,000-$1,000,000. What factors should you consider? Choose either the VC deals (1&2) or the Angel deals (3&4) and justify.
2. Depending on which direction you chose from part A (VC or Angel), evaluate the two deals (either 1&2 or 3&4). Calculate/evaluate the following:
What is the Post-Money Valuation in each deal
How is the equity split between investors, stock options pool, and founders in each deal
Which of the two deals, based purely on the numbers, do you accept – be sure to tell me why.
3. Congrats, it is 2 years after you took the investment and you have an offer to sell the company! Based on the Liquidation Preference of EACH of the 4 deals, tell me which deal is better for the founders in each of the two cases (VC and Angel). The offer to buy the company is for $60 million dollars. Be sure to show calculations.