The risk that a team, a leader, or a company cannot execute on their promise or their ideas. Investors generally prefer a high-quality team with a low-quality idea over a low-quality idea with a high-quality team. This is because there is so much risk in execution. MOST teams CANNOT deliver. So a team that CAN deliver is worth the investment. Show you can deliver and reduce execution risk.
Minimum Viable Product
This is the smallest, simplest product that you can create to achieve at least some part of your vision. A minimum viable product may be a small fraction of what you hope to achieve, but it is useful enough that people can start buying it and start giving you feedback. Start with a minimum viable product to minimize your seed investment, get early feedback from your investors and prospects and stay flexible with your development.
Start-up Business (What is a start-up?)
A start-up, the way we use the term, is a growth business that is just getting started. The owners intend to create a company worth hundreds of millions of dollars. They plan to get to $30 million in sales in the next 3-5 years and plan to professionalize the business. This means that the start-up team will bring in management and even step out of the business if necessary. The Start-up focuses on building the business over the long term, not just creating a business that helps them live today. Investors are interested because they agree with the start-up’s approach to achieving that goal, see that the start-up needs some cash to get going and provide that cash to achieve that long term goal.
Startups often start with “seed money” from friends, family, angel investors, and venture capitalists. This is where convertible notes are often used because the company has not been valued yet.
Companies who have stuck around long enough to show serious growth usually move on to Series ‘A’ fundraising. The company is now proven enough to be valued, and stocks can be issued.
Valuing a company.
This is a process of determining what a company or business is worth.
Exit Vs. Fail
Exit: a company is aware they are not able to continue because of a lack of income. The company is not broke, and they make a plan to exit from the market.
Fail: a business has run out of money and has no recovery or exit plan.
The dollar amount of a loss you can deduct from your income on your taxes will lower your tax burden for that year.
Sometimes you can carry over a loss for several years.
If the note did not include any language providing a guarantee to the investor, it is “unsecured” debt, which means there was no collateral against the debt.
Suppose another investor had a guarantee written into their note. In that case, they may be first in line to recoup any money available to repay the company’s debts, meaning you are less likely to receive any repayment.