Donald Trump’s Personal Guarantee.

About Ben Kotch: Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law. For more, please follow on Twitter. NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Much like his business career, Donald Trump’s presidential election was filled with controversy. Trump, like many real-estate developers, is known for taking out large loans to finance his projects. For years, Donald Trump has used a powerful tool when dealing with bankers: his personal guarantee.

Many small business owners, and microcap management teams, would prefer not to provide personal guarantees when borrowing money. I always find that strange.

Borrowers who ask investors/lenders to invest in their company but don’t want to provide a personal guarantee present a huge red flag. If you don’t believe in your business enough to personally guarantee an investment, why should an investor or lender believe in your business enough to make a loan?

While a personal guarantee ensures confidence among investors, it also ensures that management will continue to be motivated to operate the business. Knowing management is committed is important because replacing small business management teams can be difficult if not impossible. 

My advice is to follow the President’s lead. If you take on outside capital, don’t shy away from personal guarantees or other mechanisms designed to protect your investors.


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.
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Innovation Through Acquisition Led To Snapchat’s Spectacles… and future

Innovation Through Acquisition Led To Snapchat's Spectacles... and future

Lately, Snapchat (or Snap, Inc.) has been a hot topic in the startup and finance community because of their newly launched Spectacles and $25 billion IPO plans. While both headlines are very interesting, I recently saw another Snap-related article that was even more interesting to me.

The article – “How Snapchat secretly bought a struggling startup, then bet the future on it” by Alex Heath of Business Insider – discusses how in early 2014 Snapchat acquired Vergence Labs, a small Los Angeles camera glasses startup.

Vergence Labs had its own version of camera glasses called Epiphany Eyewear. While Epiphany Eyewear shared many similarities with Spectacles, the Vergence team had much bigger plans than just taking video with glasses.

In 2013, Vergence was struggling. While the team was working on the software to power the glasses, trying to overcome manufacturing challenges, and struggling to communicate their message – Google began to promote Google Glass.  The team decided they needed to simplify things and pitch Epiphany Eyewear as a “cooler” and simpler version of Google Glass. This meant postponing other, more aspirational projects like a helmet that could recognize people based on their FaceBook profiles.

One strategy the team decided to pursue to become cooler and simpler was a potential partnership with Snapchat. As luck would have it, one of Vergence’s founders happened to live on the same dorm floor as Snapchat founder Evan Spiegel, during their freshman year at Stanford. Four months after reconnecting, Spiegel acquired Vergence for $11 million in cash and $4 million in stock.

According to the Business Insider piece, “The acquisition of Vergence was a foreshadowing of Snap’s new identity as a ‘camera company.’

A number of former Vergence employees still work at Snap, Inc. on the Spectacles team and Snap Labs, a secretive division working on other hardware and software products.

Business Insider points out that “Snap has looked at various types of wearable cameras in addition to Spectacles, including small clip-on video cameras, and it has had acquisition talks with several camera companies. Snap has hired hardware engineers from companies such as Apple, Nest, and GoPro.”

The BI article is fairly long but full of interesting details. You can check it out HERE.

This story reminds me of microcaps that often acquire businesses and change the direction of their business. What do you think?

As The Slopes Begin To Thaw, Jay Peak’s Assets Are Frozen.

As The Slopes Begin To Thaw, Jay Peak's Assets Are Frozen.
Jay Peak Ski Resort president Bill Stenger

Last Thursday, the Securities & Exchange Commission announced “fraud charges and an asset freeze against a Vermont-based ski resort and related businesses allegedly misusing millions of dollars raised through investments solicited under the EB-5 Immigrant Investor Program.

That “Vermont-based ski resort” is Jay Peak, Vermont’s northernmost ski resort. The mountain is perhaps as well known for its use of the EB-5 program as it is for great terrain and snow conditions.

For those of you who don’t know what the EB-5 program is – the program is a path to U.S. citizenship through investment. The program requires applicants to “invest $1,000,000, or at least $500,000 in a targeted employment area (high unemployment or rural area)

Jay Peak has used the EB-5 program to raise “over $350 million from foreign investors to expand its facilities and create local jobs“. While some of the funds were indeed used to expand the Jay Peak facilities and create jobs, according to the SEC, $200 million was misappropriated including “$50 million of investor funds intended for an expansion of the property [used for] personal expenses“.

The SEC charges that the owners of Jay Peak, Ariel Quiros and William Stenger, inappropriately used funds for things like; “buying Jay Peak from its previous Canadian owners, and the funding of credit lines, income tax payments, purchases of real estate, and the repayment of sizable margin loans“.

Quiros lives in Miami according to investigators and shortly after the SEC announcement a “federal judge in Miami ordered the assets of Jay Peak and related businesses frozen“.

As the Vermont ski season comes to an end and the mountains begin to thaw, Jay Peak (assets) will remain frozen. At least the SEC waited for the end of ski season!

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Damn Spotify, Back At It Again With The Convertible Debt!

Spotify just raised $1 billion with convertible debt after announcing  $500MM in convertible debt a few months ago. In reaction, TechCrunch posted an article titled “Spotify raises $1 billion in debt with devilish terms to fight Apple Music“. While the writers at TechCrunch may think the terms of the convertible debt  are “devilish”, this financing seems more angelic to me.

Key Terms Are As Follows:

–  $1 billion in convertible debt from “TPG, Dragoneer, and clients of Goldman Sachs

– 20% discount to IPO price

If no IPO within the next year, discount goes up 2.5% every extra six months

– 5% annual interest on the debt

Plus 1% more every six months up to a total of 10%

– Note holders subject to 90-day lockup after the IPO (90 days less than 180-day lockup period for Spotify’s employees and other investors)

While this deal has the potential to hurt early investors (including employees and other shareholders), it is only a problem if Spotify (and thus the IPO) doesn’t perform well. In my opinion, that is the only real negative of this deal.

As I’ve discussed in previous posts, its hard out there for unicorns (especially those, like Pebble, competing with well-funded tech giants). So why is this a good deal?

Why This Is A Good Deal For Spotify:

Comparatively, Terms Are Decent: While the terms may appear rich to some, they are not so bad considering the ratchets, liquidation preferences, and other anti-dilution type covenants rampant among late stage unicorn financings. Additionally, more traditional financing consist of locked in valuations providing substantial upside in addition to downside protections.

VCs Are Nervous: Traditional VCs have become cautious of unicorns as exit options are limited (slow IPO market), firms write down the value of their unicorn holdings, and unicorns begin to fail or suffer down rounds.

Competition Is Fierce: Competition has drastically increased and, like Pepple, Spotify is now competing with Apple and other well-funded players.

Valuation Determined In Future: In a difficult environment for unicorn financing, Spotify can maintain its valuation while raising significant capital all priced in the future when the company and or markets are (hopefully) in better condition.

 

Bottom Line:

If Spotify plans on performing well, this deal isn’t “devilish”! But, if Spotify plans on struggling to grow and compete then this deal will be bad for Spotify but, at that point, they will have bigger problems than convertible debt.

I should also point out that, “while there were reports in January they were looking to raise $500 million via convertible debt it’s not clear whether that amount was raised, or the $1 billion we are seeing today is the result of those attempts“. At the time, the terms on the $500MM (leaked by a Swedish newspaper) outlined a 17.5% discount and 4.5% annual interest compared to 20% and 5% respectively for this $1 billion round.  

What do you think? Is this a good deal for Spotify? Does Spotify have any other options? Will Spotify win the music streaming wars?


 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Kickstarter King Laying Off 25% of Staff a Reg A+ Candidate?

Kickstarter King Laying Off 25% of Staff a Reg A+ Candidate?

Smartwatch pioneer Pebble recently announced they were laying off 25% of their staff. Pebble CEO Eric Migicovsky told Tech Insider– “We’ve definitely been careful this year as we plan our products,” Migicovsky said. “We got this money, but money [among VCs in Silicon Valley] is pretty tight these days.”

Perhaps you have heard of Pebble as they were “one of the first companies to launch a modern smartwatch”. Unfortunately, first doesn’t mean much in Silicon Valley, especially when your competitors are tech giants like Apple and Samsung.

Pebble was also one of the most successful KickStarters ever. Not only did Pebble’s 2012 Kickstarter raise $10.3 million but when Pebble went back to Kickstarter, in 2015 with an updated product, they raised $6.2 million in less than 4 hours. In total, Pebble raised over $30 million with two Kickstarter campaigns.

Since its Kickstarter success, Pebble decided to look for a more traditional VC funding. Unfortunately for them, it has been a bumpy road. Last May, TechCrunch reported that the company turned “to a Silicon Valley bank for a $5 million loan and $5 million line of credit” versus more traditional equity funding. As of writing this “Migicovsky also confirmed that his company had raised $28 million in debt and venture financing over the past eight months”.  Even with the Kickstarter success and VC funding, Pebble is still forced to layoff staff.

The slow IPO market, fears of a unicorn bubble, and fierce competition in the smartwatch space have caused VCs to be cautious. Perhaps this will be a blessing in disguise for Pebble, the kings of crowd funding.

With Reg A+ transforming the crowd funding landscapes and the recent success of Elio Motors’ Reg A+, this may be perfect timing for Pebble to use Reg A+ to alleviate their funding problems. While I haven’t been able to find anything official regarding a Pebble Reg A, this may be the natural solution for the kings of crowd funding and other tech companies struggling to raise capital in Silicon Valley.

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

27% Less OTC Graduates In 2015 Than 2014.

27% Less OTC Graduates In 2015 Than 2014.
In their January 2016 newsletter, OTC Markets Group announced that they continue to be the “Global Leader in Exchange Graduates”. OTC Markets Group also highlighted that “Over the past five years, nearly 400 companies have used OTC Markets Group as a springboard to a national securities exchange listing” (bold emphasis added).
With 60 graduates, the OTC had 51 more graduates than the junior exchange with the second highest number of graduates (the TSX with 9 total graduates). While its clear that the OTC Markets produces more graduates than any other exchange, 2015’s 60 graduates are 23 (or about 27%) less than the 83 OTC graduates of 2014. It is also less than the average of approx. 80 graduates/year over the last 5 years (400÷5).
In their newsletter, the OTC Markets Group did not elaborate on the decrease in graduates. This decrease got me thinking; why did less OTC companies uplist in 2015?
I came up with four possible answers:
Regular Fluctuation: Based on the “nearly 400 companies [have graduated in the last 5 years]” stat, the average graduation rate was approx 80/year. While a 25% fluctuation from the average is significant, with so few graduates annually, just a handful of companies can have a big impact.
Issuers Are Staying On The OTC: Over the last couple of years the OTC Markets has made great strides, improving the standards of both their QB and QX tiers. Perhaps this increased quality of the QB and QX has made more issuer comfortable staying on the OTC for longer.
Less IPOs/Reverse Mergers: 2015 was one of the slowest years for IPOs and reverse mergers. In 2015, IPOs were down 34% from 2014 and reverse mergers were down 42%. Less new issuer joining the OTC may mean less issuers trying to uplist.
Seasoning Rules: Issuers who have gone public via reverse merger must comply with “seasoning rules” that require certain issuers to trade on the OTC (or similar exchange) for a minimum of one year before joining a senior exchange. Whiles these rules aren’t new, they may discourage companies from quickly jumping from the OTC to a senior exchange.
Those are my guesses as to why there were nearly 30% less up-lists in 2015 than 2014. Perhaps I am off the mark. I had a hard time finding up-list data for 2013, 2012, or 2011. It would be interesting to look at some more data to see what insights it might provide… maybe another day!

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR ENTERTAINMENT PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Unicorn Shareholders Ready To Leave Fantasy Land.

Unicorn Shareholders Ready To Leave Fantasy Land.

In a previous post, “For Unicorns, It’s a Long Road Out of Silicon Valley.“, I discussed the issues with unicorn exits. Now, it seems like the dreamers of Silicon Valley are beginning to wake up.

A recent article on TechCrunch titled “Secondary Shops Flooded With Unicorn Sellers“, shows concern is growing in the heart of unicorn land. VC’s, employees, and even founders are all looking to exit their unicorn holdings. One of the article’s sources added “The smartest inside money is trying to get out for the first time in six years”.

Struggling IPO markets (January saw not one IPO and recent unicorn IPOs have had poor results) , ratcheted valuations, unicorn failures, and large firms devaluing their unicorn holdings , have those holding unicorn shares worried about becoming “bag holders”.

So far, secondary trades continue to go through. While the “premium” unicorns are still receiving strong valuations, other unicorn sellers are having to take lower prices. Time will tell if this is the extinction of unicorns or just a market correction.


 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR ENTERTAINMENT PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

8 Tips For Attending Micro-Cap Conferences.

Micro-Cap ConferencesThere are a number of great “micro-cap conferences” held annually for micro-cap management teams, investors, and service providers. With dozens of events every year, micro-cap conferences are a great way to meet others in the micro-cap space. Some top events include the Marcum Micro-Cap Conference, SeeThru Equity Conferences, Noble Financial’s NobleCon, and LD Micro.

While micro-cap conferences are all pretty similar, these conferences have some unique characteristics when compared to other industry conferences (even VC/Private Equity conferences I’ve attended). Below I’ve listed 8 tips for attending micro-cap conferences.

1. Positive Attitude – As in life, attitude can make or break an event for you. I’ve met a lot of people at these events with attitudes at both ends of the spectrum. Having a positive attitude seems pretty obvious but I’ve met with people who very clearly don’t want to be at the event. They complain about their other meetings, the event in general, micro-caps, or the other people at the event. These conferences are your opportunity to show other professionals in the micro-cap space what you and your company are all about. Put on your game face and be positive!

2. 1-on-1 meetings – Nearly every micro-cap event offers 1-on-1 meeting for management teams and investors to meet. If you’re an investor or part of a public company’s management team, my advice is to have as many 1-on-1s as possible! When I started going to these conferences, I would schedule only a few meetings and plan on mingling and attending presentations the remainder of the time. Eventually, I realized the best way to get value out of these conferences was to schedule as many quality 1-on-1s as possible. Now when I go to these events, I do some high-level DD and schedule meetings with anyone I think might be a good fit. I also recommend accepting all of your meeting requests because maybe the requester saw a potential synergy that you didn’t notice. Lastly, if you’re requested for more meetings that you can’t attend, introduce another member of your team. The goal is to spend as much time as possible meeting people and the easiest way to do that is to plan to meet in advance!

3. Have a Plan – Ask yourself, why am I attending this conference/what are my goals? Once you establish your goals, put together a plan for reaching them. I’ve found the value of any conference increases exponentially with just a little bit of planning.  For more tips on preparation, check out these links from Axial.net: “pre-conference checklist” and “How to Master Industry Conferences & In-Person Meetings“.

4. Share with Connections –  Most conferences are held in large coastal cities — the same cities where many of your contacts, supporters, and shareholders are located.  Many of those connections may already plan on attending the event or may decide to attend the event to meet with you! PR it, tweet it, blast it, blog it, etc. Attending these conferences are something to talk about and a reason to catch up with old connections. The best part is, letting your connections know you will be there will allow you to schedule a meeting in advance and get them thinking about others in their network they can introduce you to at the conference!

5. Bring the Team – If you do it right, your schedule will fill up fast. Bring the team with you so they can carry some of the load. Don’t be afraid to split up! Do 1-on-1s on your own, eat lunch at separate tables, and mingle in small groups or solo (you’re much more approachable when you are on your own than when you are huddled in the corner with your colleagues).

6. Talk to sponsors – Talk to service providers and other companies with sponsor booths. They spent a lot of money to set up a table and talk to people like you! These are easy introductions and a good way to warm up your mingling skills. Find out how they can help you and how you can help them. The sponsors probably already know a lot of people and are also meeting a lot of new people. Wouldn’t these sponsors be a great group to add to your network?

7. Talk to Media – From micro-cap specific media to mainstream financial publications, there will be some level of media presence at all of these events. Don’t be shy! Find out what they are doing/looking for and if they would be interested in interviewing you. If you are a presenting company, you are often given the option to webcast your presentation – dot it!

8. Follow Up – Always follow up with everyone you meet, even if there doesn’t appear to be a fit. Following up via email solidifies yourself in their network because next time you email them they will easily be able to look you up to see how they know you/where you met. It’s also a good time to add them on LinkedIn. For more advice on following up, check out this post on Forbes HERE.

The great thing about these conferences is that they bring micro-cap investors, companies, and service providers from across the country together in one place. Attending with your “A-game” will allow you to meet more people during the few days at the event than you may meet the rest of the year!

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

 

Why I Don’t Want to Sign Your NDA.

MicroCap NDASpeaking with hundreds of public and private companies each year, I am often asked to sign NDAs. While there are certain situations where signing an NDA is warranted, all too often signing an NDA is an unnecessary complication. So, why won’t I sign your NDA? For four simple reasons (five if your a public company); (1) I don’t want to steal your idea, (2) NDAs create unnecessary liability, (3) signing an NDA can potentially limit me from working with other companies, (4) I don’t need the recipe if I don’t even like the cookie, and (5) (as a public company) your material value proposition should already be clear to the public!

(1) The first point, “I don’t want to steal your idea“, is usually the biggest concern for CEOs and the silliest for investors. I see boatloads  of great ideas every year, but very few actually turn into successful businesses. A successful business is made up of much more than a good idea.  (That being said; time, knowledge, and passion are very important ingredients for success.) Like most investors, my time, passion, and brain power is dedicated to doing deals not stealing other people’s ideas.

(2) The second point, “NDAs create unnecessary liability“, is easy for those with a basic level of legal knowledge to understand.  Signing an NDA, that covers a specific time period creates long term liability relating to a company I may only speak with a few times. Of the hundreds of opportunities I see, only a select handful turn into actual deals. If I signed an NDA with every company that never turned into a deal, I would have hundreds of NDAs to keep track of! Not to mention the best way to limit my liability would be to have my attorney look at the document. My attorney would then have comments that you would need to run by your attorney turning signing a two page document into a time consuming and expensive ordeal.

(3) Our third reason, “I can potentially be limited from working with other companies“, is related to point two. NDAs often have language that attempts to (or can be construed to) limit the parties from working with other companies in similar industries, with similar business models, etc. This creates tremendous liability for an investor who looks at hundred of deals a year, particularly if that investor specializes in a specific industry or niche. If I signed an NDA with everyone I spoke with, I would soon be unable to speak with anyone!

(4) The fourth and perhaps most simple reason is “I don’t need the recipe if I don’t even like the cookie“. For investors, the most important information isn’t how you make your cookie, it’s how your cookie tastes! Investors want to know that your cookie is good and that it will sell. Once we know the cookie will sell we may wan’t to know about the ingredients. This is also a good point to consider when presenting to investors. If you have a great app, service, medicine, technology, etc., don’t complicate things with the technical’s of how it works. Talk about how it makes money!

(5) An additional point for public companies is that investors don’t want to come over the wall, especially during early conversations! If public and non-material information can’t explain the opportunity, then you have a bigger problem than NDAs. As a public company, your value proposition should be clearly available to all potential investors and any significant material information should be made public within a week of its occurrence. Now, some CEOs think having investors sign NDAs has something to do with insider trading. Insider trading is illegal and most legitimate investors have a lot more to lose than they have to gain by trading on inside information.

So now you know why investors don’t like to sign NDAs! If you don’t want to take my word for it, check out these other sources:

Why VCs Don’t Sign NDAs and You Shouldn’t Worry About It” by John Rampton on Entrepreneur.com

Why Investors Don’t Sign NDAs” by Wil Schroter on Fundable and Forbes.

Why Most VC’s Don’t Sign NDAs” by Brad Feld founder of Techstars & Foundry Group

 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.

 

 

What do Unicorns & Micro-Caps have in common?

ratchet

The recent IPO of Square, Inc. has many taking a closer look at Silicon Valley and their “unicorns”. In  a previous blog post I discussed  how “For Unicorns, It’s a Long Road Out of Silicon Valley.” While its a difficult journey for unicorns, its a little easier on investors because of “ratchets”. If you are the CEO/CFO of a microcap public company, the ratchet concept is probably very familiar to you (although you may be familiar with terms like market conversions, downside protection, market adjustment, etc.). For those of you unfamiliar with the concept, Investopedia defines a “full ratchet” as;

“An anti-dilution provision that, for any shares of common stock sold by a company after the issuing of an option (or convertible security), applies the lowest sale price as being the adjusted option price or conversion ratio for existing shareholders.”

Simply put, ratchets allow companies to raise capital at high valuations by promising investors, that if shares are issued at a lower price, they will have their investment repriced at the new (lower) price or a discount to the new price. For public companies the ratchet is usually based on market price or some calculation thereof. For private companies the ratchet is usually based on the valuation of future private funding rounds, an IPO price, or the sale price (if the company gets acquired).

Those in the micro-cap space know that virtually every funding deal has a ratchet because of volatility in the market and substantial risk. Often, those in the micro-cap space think the ratchet is  an aspect unique to small public companies. What many don’t know is that even Silicon Valley unicorns have ratchets in their funding transactions.

According to law firm Fenwick & West LLP, about 30 percent of private unicorns have/had a ratchet in place with at least some of their investors. In the case of Square, some investors were “guaranteed returns of as much as 20 percent on their investments“. Whats more, in addition to ratchets, unicorn funding transactions also include things like liquidation preferences, board seats, and controlling preferred stock (just to name a few). If you’re a micro-cap CEO, next time an investor asks for downside protection  just sit back and smile because at least you’re not a unicorn!

 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.