It’s the middle of internet week! I’ve already seen 30+ demos, in addition to Meetup Co-Founder Scott Heiferman smashing an iPad on stage at the tech meetup last night (which was at NYU’ Skirball center). One theme that has been recurrent is that people are unaware of the structure of angel investments. So, I thought I’d give a brief overview of one common structure. Please note there is an excel file you can download at the bottom of the post. It includes detailed notes and may be helpful to have open as you go through the post.
Many seed stage internet businesses look to angels to help them kickstart their companies through growth capital, as well as expertise. It seems that many people are confused as to what a typical angel investment might “cost” them in equity. And, while “a convertible note with a 10% PIK and a 25% discount to the series A” (also known as the “plain vanilla” angel structure) may make sense to some people, I thought I’d break down how to interpret that in case there were any non finance geeks out there who were trying to understand what the terms of an angel investment actually mean.
The Basics
I think it’s easiest to use an example to explain this type of investment. So, Joe is the founder of Newco which is a website that does some sort of location/game based virtual good (insert other buzz words) service. Joe needs to raise $500,000 to hire a few developers and a sales person. Joe finds an angel investor who just happens to have a lot of experience in location/game based virtual good services. Joe’s investor, let’s call her Ms. Jenna, gives him $500,000 and they use the plain vanilla (read typical) angel structure.
Instead of putting a value on the company now, the investor, will get equity based off of the valuation used in Joe’s Series A round of financing (more on that later). Presumably, when Joe raises his Series A, he will have a few customers, some revenues, and a much better picture for how his company will actually operate. His company will therefore be more easily valued.
The PIK
PIK stands for paid in kind. Ms. Jenna is putting up $500,000, and expects Joe to pay her 10% in interest each year. But, Joe doesn’t have any cash as he is a pre-revenue startup. So, instead of paying in cash, Joe is going to take the value of the dollars he would pay Ms. Jenna, and add that to the principal of the investment.
In our example, in the first year, Joe will take the 10% interest payment (worth $500,000 x 10% = $50,000) and add that to the principal of the investment, which will now be $500,000 + $50,000 = $550,000. In the next year, Joe will be charged 10% on that new principal. His new interest payment is $550,000 x 10% = $55,000. And his new principal amount is $550,000 + $55,000 = $605,000. For those familiar, this is the same concept as a negatively amortizing loan. Instead of paying interest in cash, it is paid as principal, which is the same as saying it is paid in kind (PIK).
The Equity Part of the Equation
We are going to pretend that Joe had a rough go of it and doesn’t raise his series A for 5 years. In year 5, the principal value of Ms. Jenna’s investment is now $805,225 (please see attached excel to see the calculations, rows 19 and 20 – we just added the 10% interest in each of the 5 years). The series A investor gives Joe $1 million dollars at a $4 million post-money valuation meaning that they will get $1 mm/$4 mm = 25% of Newco’s equity. For the difference in pre vs post money valuations, please see the attached excel cell C14.
We said that the angel investment would be invested at a 25% discount to the series A. This means that instead of investing at a $4 million valuation, Ms. Jenna’s dollars get put to work at a $4,000,000 x (1-25%) = $3 million valuation. And, her $500,000 originally invested has grown to $805,225 due to the interest which has been paid in kind. So, her ownership in the company will be $805,225/$3,000,000 = 27%.
At the risk of complicating things, it is worth noting that Ms. Jenna’s original angel investment can also come with a valuation cap, meaning that there is a maximum value that her dollars can be put to work at. In the excel, I have put this at $10,000,000 so it doesn’t come into play. But, if Joe’s company was worth $20,000,000 in 5 years when he raised his series A, Ms. Jenna’s equity would be calculated using a valuation of $10,000,000, not the typical 25% discount we have used in our example. You can see how this benefits the angel investor in the case that they company does take off. Ms. Jenna will invest her money at a $10,000,000 valuation as opposed to a $ 15,000,000 valuation ($20,000,000 x (1-25%) = $15,000,000) which would give her a larger equity stake in the company.
End Result
Joe has now raised $1.5 million and is hopefully well on his way to a successful career at the helm of Newco. He has given up 25% to his series A investors, and 27% to his angel investor Ms. Jenna, and so retains 48% for himself and the rest of his team.
The attached excel sheet has all of these calculations and is set up in a way that you can play around with different assumptions. Please feel free to email me with any questions! phil (at) philstrazzulla (dot) com. Also, please note that this is meant to be an overview of one type of common angel structure and that there are definitely more out there. Enjoy!
Excellent post. I was checking continuously this blog
and I’m impressed! Very useful info specially the last part 🙂 I care for such information much.
I was looking for this particular information for a long time.
Thank you and best of luck.
my web page; 선수알바
Whenn the search is on for that ideal job, it can be hard tto know where to start.
Feel free to surf to my homepage: 텐카페알바
Hi, i think that i saw you visited my site so i came to “return the favor”.I’m trying to find things to improve my
site!I suppose its ok to use some of your ideas!!
My family every time say that I am wasting my time here at net, except I know I am getting knowledge every day by reading thes nice articles or reviews.|
If some one desires to be updated with newest technologies afterward he must be go to see this website and be up to date all the time.
Thank you for sharing your info. I truly appreciate your efforts and I
will be waiting for your next post thank you once again.
I was wondering if you ever considered changing the page layout of your site? Its very well written; I love what youve got to say. But maybe you could a little more in the way of content so people could connect with it better. Youve got an awful lot of text for only having 1 or 2 pictures. Maybe you could space it out better?|
Hello outstanding website! Does running a blog such as this take
a massive amount work? I’ve virtually no knowledge of programming however I was
hoping to start my own blog soon. Anyways, should
you have any ideas or tips for new blog owners please
share. I understand this is off topic but I simply wanted to ask.
Thanks!
I am no longer sure the place you’re getting your information,
but good topic. I must spend a while studying more or figuring out more.
Thank you for great info I was searching for this information for
my mission.
eilstee baf94a4655 https://trello.com/c/qH4b6z3X/69-battle-royale-for-your-heart-versi%C3%B3n-completa-2022
Quality posts is the secret to invite the visitors
to go to see the website, that’s what this site is providing.
Spending tons of money every year on SEO softwares?
New! Shared SEO Tools Accounts for the lowest cost GUARANTEED
Start saving from today and keep using your best SEO tools!
★ SEMrush – Only 17.99$ a month ★
★ Ahref – Only 17.99$ a month ★
★ Majestic – Only 17.99$ a month ★
★ WordAi – Only 17.99$ a month ★
★ Article Forge – Only 17.99$ a month ★
and also…
★ NETFLIX ACCOUNTS ★
★ YOUTUBE PREMIUM ACCOUNTS ★
★ SPOTIFY PREMIUM ACCOUNTS ★
★ APPLE MUSIC ACCOUNTS ★
with a Lifetime guaranteed!
▼ SHOP NOW ▼
https://bit.ly/premium007
SECURE PAYMENTS
✔ CREDIT CARD
✔ PAYPAL
✔ CRYPTO
hekeval baf94a4655 https://trello.com/c/Fd3WHI5S/58-descargar-vthree-versi%C3%B3n-completa
Very descriptive article, I liked that bit. Will there
be a part 2?
We’re a bunch of volunteers and starting a brand new scheme in our community.
Your website offered us with helpful information to work on. You have done an impressive job and our whole neighborhood can be
grateful to you.
This implies that if your 1st bet is for $one hundred, and it loses, BetMGM
will refund tthe $one hundred.
Here is my web page … 실시간 바카라 사이트
edrman baf94a4655 https://trello.com/c/xOSDJ3Od/98-proxy-blade-zero-versi%C3%B3n-completa-2022
Magnificent website. Plenty of useful info here.
I am sending it to a few friends ans additionally sharing in delicious.
And of course, thank you on your effort!
ไม่ผ่านเอเย่นต์ เราคือ สล็อตเว็บใหญ่ JOKER ที่เปิดให้บริการ jokerslot มากกว่า
500 เกม 500 รูปแบบ เว็บตรงสล็อต JOKER ของเรา มีผู้ใช้บริการ มากกว่า 5 หมื่นคน สามารถร่วมสนุกและทำกำไรจาก SLOT JOKER ได้อย่างไร้กังวล JOKER123 มาพร้อมโหมด ทดลองเล่นสล็อต JOKER
เครดิตฟรีสล็อต 10,
000 บาท มีสูตรโกงสล็อต
JOKER ฟรี และโปรโมชั่นอีกเพียบ เปิดให้บริการ ทางเข้า SLOTJOKER ตลอด 24 ชม.
สามารถร่วมสนุกกับ JOKER SLOT ได้อย่างไร้ขีดจำกัด สมัครสมาชิกใหม่ สล็อต โจ๊กเกอร์ ตอนนี้ ฝาก10รับ100 และโปรโมชั่นอีกมากมาย ได้ที่ เว็บสล็อต JOKER ตลอด 24 ชม.
Hmm is anyone else experiencing problems with the images on this blog
loading? I’m trying to determine if its a problem
on my end or if it’s the blog. Any suggestions would be
greatly appreciated.
A nicely-retained litter box not merely assists a cat remain mentally and physically
wholesome, but In addition it makes it possible for our
feline companions to remain considering making use of it for
carrying out their “small business”. Usually, they
may choose a cleaner spot of your home which
may or may not contain a litter box
I like the helpful information you provide in your articles.
I will bookmark your blog and check again here frequently.
I am quite sure I will learn lots of new stuff right here!
Good luck for the next!
Hey there! Do you use Twitter? I’d like to follow you if that
would be ok. I’m definitely enjoying your blog and look
forward to new updates.
kachmeag baf94a4655 https://coub.com/stories/4909712-combat-overrun-gratuita
Hey there, I think your website might be having browser compatibility issues.
When I look at your website in Chrome, it looks fine but when opening in Internet Explorer, it has
some overlapping. I just wanted to give you a
quick heads up! Other then that, wonderful blog!
I have been surfing on-line more than 3 hours these days, yet I by no means found any fascinating article like yours.
It’s pretty value sufficient for me. Personally, if all website owners and bloggers made
good content as you probably did, the net might be a lot more helpful than ever before.
Hi to every body, it’s my first pay a quick visit of
this website; this weblog includes remarkable and genuinely fine stuff designed for
visitors.
Aw, this was an extremely good post. Finding the time and actual effort to generate a superb article… but what can I say… I
put things off a whole lot and don’t seem to get nearly anything done.
Very nice post. I just stumbled upon your blog and wanted to say that I have truly enjoyed surfing
around your blog posts. In any case I will be subscribing to
your feed and I hope you write again soon!
Woah! I’m really loving the template/theme of this site.
It’s simple, yet effective. A lot of times it’s difficult to
get that “perfect balance” between user friendliness and appearance.
I must say you’ve done a very good job with this.
Additionally, the blog loads extremely quick for me on Opera.
Outstanding Blog!
My web page :: 우리카지노
Hey There. I discovered your blog using msn. This is a very neatly written article.
I will make sure to bookmark it and come back to learn extra of your helpful info.
Thanks for the post. I will definitely comeback.
Here is my page 우리카지노
My relatives all the time say that I am killing my time here at web,
however I know I am getting familiarity daily by reading thes nice content.
Feel free to visit my webpage – 우리카지노
egbath baf94a4655 https://coub.com/stories/4908231-descargar-death-to-the-dragon-lord-version-pirateada
Hiya very nice web site!! Guy .. Excellent .. Superb ..
I will bookmark your website and take the feeds additionally?
I am satisfied to find a lot of helpful information here within the submit,
we’d like develop more techniques on this regard, thanks for sharing.
. . . . .
I used to be able to find good information from your articles.
Feel free to visit my blog – 우리카지노
This article offers clear idea in favor of the new users of
blogging, that truly how to do blogging and site-building.
Feel free to surf to my blog post :: antigua travel restrictions
wonderful publish, very informative. I’m wondering why the opposite specialists of
this sector do not notice this. You must continue your writing.
I am confident, you’ve a huge readers’ base already!
Its like you learn my mind! You seem to understand a lot about this,
such as you wrote the guide in it or something.
I think that you just could do with some % to pressure the message
house a bit, but other than that, that is great blog. A great read.
I will definitely be back.
my blog post; 카지노사이트
Pretty! This has been a really wonderful article. Many thanks for supplying this
information.
I enjoy what you guys are up too. This sort of clever work and reporting!
Keep up the awesome works guys I’ve included you guys to my own blogroll.
Here is my web-site; 카지노사이트
I think this is among the most vital information for me.
And i’m glad reading your article. But should remark on some general things, The website
style is perfect, the articles is really excellent : D.
Good job, cheers
Feel free to surf to my site; 바카라사이트
bookmarked!!, I really like your website!
Here is my blog; 바카라사이트
We are a bunch of volunteers and opening a new scheme in our community.
Your website offered us with helpful info to work on. You’ve done
an impressive activity and our whole group might be grateful to you.
Feel free to surf to my homepage; 우리카지노
maolper baf94a4655 https://coub.com/stories/4907710-descargar-run-for-coins-gratuita-2021
I feel this is one of the so much vital info for me. And i’m glad reading your article.
But should statement on some normal issues, The website style is great,
the articles is in point of fact great : D. Just right activity,
cheers
Magnificent site. A lot of helpful information here. I am sending it to some buddies ans additionally sharing in delicious.
And certainly, thank you in your sweat!
Here is my site; 카지노사이트
Wir empfehlen während deiner Shopping Tour durch die Boulevards auch mal nicht weit von hier zu biegen und einer der Abzweigungen zu nehmen.
Die engen Gässchen sind schön schattig und machen oft mehr Spaß als die großen,
auf denen eine größere Anzahl Menschen unterwegs sind.
Die Passeig d’es Born ist die Flaniermeile von Palma
de Mallorca und verbindet die Kathedrale eine
der Altstadt. Die Straße ist von schattigen Alleebäumen umsäumt und hervortreten viele Bänke,
auf denen du mal eine Verschnaufpause einlegen kannst.
Die Geschäfte gehören eher zur gehobenen Preisklasse,
du findest aber auch die gängigen Ketten, wie H&M und Zara.
Dazu stoßen viele Bars und Restaurants, in denen du wunderbar draußen sitzen kannst.
Die Passeig d’es Born erinnert stark an neben anderen die bekanntesten Sehenswürdigkeiten in Barcelona – die Ramblas – nur etwas kleiner und gemütlicher.
Sporadisch findet auch ein Buchmarkt oder eine Kunstveranstaltung statt.
Lohnt sich auf jeden Obliegen einen Spaziergang!
Thanks for sharing your info. I really appreciate your efforts and I
will be waiting for your next write ups thanks once again.
Here is my web blog; 바카라사이트
You have made some good points there. I checked on the net to find
out more about the issue and found most individuals
will go along with your views on this site.
my page – 바카라사이트
This is a topic that’s near to my heart… Take care!
Where are your contact details though?