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April 27, 2007

Comments

As a rule, I've always seen the friends and family round to be akin to charity. Whether intended or not, the vast majority of private investors put their $ into a firm because of whose in charge, and not what they are actually in charge of.

This causes two problems: high pre-money valuations that must be drastically reduced (fixed) the first time an "outsider" invests; should the company be able to raise outside $ later (which is a big victory), there is a tendency to shy away from these terms sheets so as to avoid the perception of a down round. So the company goes back to the original guys and limps along for a little while longer.

This is not to say that every tech start up needs Angel or VC capital to succeed. But putative tech startup CEOs need to appreciate that Uncle Ned's $100,000 might be single largest individual investment outside of his home.

Which isn't the right risk profile to match up against a start up.

The IDA, for example, would bounce a broker for putting Uncle Ned into the same deal.

Perhaps there's a hint there.

MRM

Hey Rick,

I agree with all your comments. In my own practices I've encouraged debt and in fact the angel based financing I'm doing now I've been encouraging a debt with a conversion later. But you also have those who are a touch less happy with those structures, usually uncle ned.

I think in rereading Mark interview I got hung up on the "the expectation should be zero or a tax loss receipt" and Mark phrasing of Friends & family round as 'charity.' I'd also just come out from a meeting with a local group of Angels a few nights earlier that made me particularly raw on the matter. Their comments left me with distinct impression that they felt we treat their 'investments' with a lack of respect.

In my own opinion, in contrast to the previous 'Uncle Ned' (who is uncle ned anyways?) stories you've told We've concentrated on making the deal an easier flow for the VC coming after the friends and Family round, and that said easier for the friends and family themselves.

While not disagreeing with anything above maybe that should be the subject of a post - How to structure you friends and family round, with an eye to the next round or not. I have seen several deals die 'or languish on valuation' because of Uncle Neds investment, I remember that earlier post on the deal that died on signatures. The concept of debt or a trust seem to be lost in this equity based world.

Also - thanks for the love boat music ;)

cheers
matt

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