Tue, 28 December 2021
3X in 3 Terms
Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.
I analyzed the results of several angel networks and found that 65% of the investments after three years were still in business but were no longer on the venture track.
In most cases, they were growing businesses but were not going to be bought out for a significant return to the investor as the market conditions had changed, competition had taken over, or the founder was no longer interested in keeping pace to achieve a venture exit.
The best-case scenario was the entrepreneur would sell the business for 2-3X after 10 years, in which case the investor would get a minimal return on investment.
In my investing experience, three years into the investment, it becomes clear if the company will continue on the venture path or not.
I often saw the entrepreneur signal their departure from the venture path by taking above-market rate salaries.
I called this taking the “payroll exit”, in which case they no longer needed an “equity exit”.
This left the investor stranded on the equity plan with no way out.
I set up a deal structure that would allow the investor to go on the payroll exit in the event the startup chose that path.
In this structure, the investor receives 3 times their investment 3 years from the date of investment. So $100K in, yields $300K out.
If the company continues on the equity exit, then the investor may choose to stay in the investment.
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