Link: Waterfall Charts and Exits
Tuesday, August 25, 2009 at 08:18AM 
This short article by Ben Dyer provides insight into the mind of the investor(s). He shares a scenario in which a company exits after an angel round and two rounds of VC funding. The first case shows how not everybody wins; the losers being the Angel and the management team. In the second case, everybody wins but it's typically not the Angel who gets to decide.
The key insight here is that Angels are particularly sensitive to being "crammed down" in later rounds. Those that have had this experience will no doubt take steps to protect themselves. (See the reply from Knox Massey.) This is why you may see anti-dilution clauses in your term sheet and why Angels may require greater than 40% of your company. This illustrates how angels may value your company when it seems that it has nothing to do with your valuation calculations. Quite simply, it's about how much of your company they need to get their return when the water falls.
What's the entrepreneur to do?
One term that seems to be entrepreneur friendly is where the angel investor has the right to participate in future rounds, hence the name, participation rights. This is what they mean when they say they are "keeping their powder in reserve."
The key takeaway is for you to have a thorough understanding of your funding needs, from the initial seed round to subsequent VC rounds, all the way through exit. The primary vehicle that communicates this is the Cap Table, showing each round of investment, along with a projected valuation. This will set the stage for your first investors, showing them how their investment is diluted through future rounds and where you plan to be at exit. This is how they will calculate their return and even though they will do it for themselves, you having done it will give them a place to start and it will show that you understand the game.
Here is the link: http://techdrawl.com/waterfall-charts-and-exits/
Reader Comments (2)
If I had a penny for every time I came here... Superb read.
If I had a buck for every time I came to www.outofthegarage.com! Superb article!