Every Time You Hear a Bell Ring, an Angel Gets Its Wings
Angel Investors, and Series A stock deals. Founders' Stock and VCs, Due Diligence and B stock. Terms Sheets and Preferences all tied up in legalese, These are a few of our favorite things. But what does it all mean? The definitions are often more confusing than the terms themselves.
First let's put them in some vaguely chronological order: Founders' stock, Angel Investors, VCs, Term Sheets, Due Diligence, Preferences, Series A, Series B.
Now let's see what they mean.
Founders' stock. People seem to think this is some special kind of stock that those people who found (or start) a company get. Actually it's just plain ol' common stock. It might have a different price than everyone else's common stock because the founders usually got it when the company was first formed, and often put in all of their ideas and intellectual property, the value of which is a guess at best. And later investors may ask the founders to sign special agreements in order to get funded. But basically it's just the common stock that the people who started the company got when they started the company.
Angel Investors. No, angel investors don't get their wings whenever you hear a bell ring. But they do make the cash register's bell ring. They are early investors, often family or friends, who put money into a company after the founders, but before the "big" venture capital money. Sometimes a VC will be an angel, and invest a small amount of money to allow the company to achieve a certain goal before trying to get the serious money.
Because angel investment usually isn't that big of a chunk of cash, and because the angels are often friends and family, it's very common not to have a very formal set of documents for the "Angel Round." Often Angel Investors will just piggy back on the eventual VC investment, and be entitled to receive exactly what the first round of VC investors get, but perhaps at a 10% discount. After all the angel is investing much earlier, and therefore with more risk.
VCs are not the Viet Cong. They are Venture Capitalists -- the professional investors. Although they could be mom and pop, but then they would probably be called angels (or mom and pop). A lot of this isn't written in stone, although many would have you believe it is, especially if you use the wrong term.
Term Sheet. Normally once a VC company gets interested in your company, you will sign a Term Sheet which is a summary of the deal that's been proposed. Usually it will include things like how many shares the VCs will buy, and how much they will pay, as well as some basic rights and preferences associated with their stock. We'll see what that means later. Feel free to email me for a sample Term Sheet.
Due Diligence. Due Diligence is basically an inspection. Just as when you buy a house, you get a certain amount of time to do some inspections before you are required to go through with the deal, so VCs get to look around a bit more before they have to wire that money into your account. During the due diligence, the VCs' attorneys will look at your corporate documentation to make sure the corporation is in good standing, there are no law suits hanging out there, that you own the intellectual property you say you own etc. Feel free to email me for a sample due diligence checklist.
Rights and Preferences. Investors usually get preferred stock. And in this case preferred means what it sounds like. The investors' stock has certain special rights and preferences, which were summarized in the term sheet and are spelled out in lengthy legalese in the final funding documents. These might include things like a certain number of places on the Board of Directors, the right to force an initial public offering (IPO), preference in terms of getting dividends. These are all negotiated between the company and the VC, under the general heading of "he who has the gold, rules."
Series A and Series B. Preferred stock is often issued in "series." The first series is called, amazingly enough A. This would be what the first set of VCs get. Often the "Series A Investors" will put requirements that any subsequent series (B through Z) not have better preferences than A.
A typical Series A deal will often involve documents which, when printed out, which for some reason VC counsel always does, usually measure in the inches, not number of pages.
Please feel free to post your comments if you have other terms that you'd like defined in plain English.
