Articles by David S. Rose

Can a private company take investment money from anyone?

Unfortunately, a private company in the US may not take investment money from “anyone”. The only people who are legally eligible to purchase an equity interest in a private company without a great deal of special paperwork are, as you noted,Accredited Investors. These are defined as a person with net assets of over $1 million (not including the value of his or her primary residence), or an income of $200,000 (not $250,000) annually for the past two years and a reasonable expectation of that for the next year. (In the case of a married couple, the amount is $300,000 together.) This is an absolute rule. There is no except for “friends”, “family”, “another guy” or anything else. It’s binary: you either are, or are not, an Accredited Investor.

Note, however, the weasel words above: “without a great deal of special paperwork”. That means a company can take an investment from people who are not Accredited Investors, however it adds so many requirements and potential issues to the arrangement, that most corporate lawyers will strongly urge you to not do it if at all possible. Among the considerations you need to take into account if you go this route are: (1) the rules for this differ from state to state, and every state needs to be handled separately; (2) there is a very limited number of such investors in total from whom you can accept an investment (the number varies by state); (3) you are required to prepare and file a Private Placement Memorandum, which is almost the same thing you would file for a public offering, extensively listing absolutely everything about the business, including pages and pages of warnings about all the things that could go wrong, and why it is a risky investment; (4) professional investors such as angels and venture capitalists are often allergic to having any non-Accredited Investors with an ownership interest; and (5) several other things.

The section of the JOBS Act of 2012 that modifies this part of the law is known asTitle III. The problems are that (a) it is not close to becoming available yet for companies because the SEC has not yet written rules for it (and shows no inclination to do so any time soon), and (b) when the rules are eventually written, they will be very, very specific about exactly what both the company and the investor need to do.

So if your goal is to take in money from “just guys”, you will likely need to wait until the Title III regulations are adopted, likely in 2013.

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

As a new independent angel investor, how will I find new companies to invest in?

The two sites you mentioned are both secondary listing services, for later stage companies. For a new angel investor, by far the best thing to do is to join a local angel investor group that belongs to the Angel Capital Association. There are hundreds of them, with at least one in every state. Major metropolitan areas typically have more than one.

Some groups specialize, investing primarily in life sciences or tech companies or women-led ventures or other areas. Some are wide open, investing in everything from real estate to films. Most are somewhere in between, focusing primarily on early-stage, high-growth companies with scalable business models. These are typically Internet-enabled, or consumer products, or medical devices.

But regardless of the specifics, what they all have in common is bringing together a group of active Accredited Investors interested in supporting young startups. Benefits of joining a group include pooling deal flow, capital, domain expertise, and investing experience. Most groups run regular education sessions for new members, and provide mentoring for less experienced investors by those with many deals under their belt.

The typical US angel group will receive a dozen or more funding applications from startups each month; the most active ones, such as New York Angels will receive over 100. Groups also often “syndicate” investments, working cooperatively to fund larger rounds that are bigger than one group can easily handle alone.

As a very rough idea of what these groups are like, the typical member invests in one or two companies each year, putting in $25,000 to $100,000 in each one.

To find one or more local angel groups near you, use the industry’s official investment group search engine at http://gust.com/find-investors.

And for a more in-depth view of angel investing, check out Angel Investors: If I want to invest $5,000 as a new angel investor, what chances do I have of making a profit in 5 years?.

 

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

How does a VC keep a track of his/her investment?

Professional investors typically have a range of information rights that they negotiate for when making an investment. While not every investor will have every right (or every right with the same frequency), the types of things we’re talking about include:

  • Seat on the Board of Directors
  • Non-voting Board Observer Seat
  • Monthly, quarterly or annual financial statements (audited or unaudited)
  • Monthly, quarterly or annual narrative management reports
  • Annual budgets
  • “Information rights” (the ability to come into the office and ask questions and view documents)

 

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

Does a startup need a CEO from the start?

You certainly don’t need a full executive suite if it is only a few co-founders. However, in my experience every organization needs one person on whose desk the buck stops. You can call this the President, or General Manager, or Executive Director, or Chairman, or Man in the Moon…but it has to be one person who is at the very least the tie-breaker, and ultimately will make the hard calls. It is this person on whom future investors will be betting, and this person who will bear the brunt of the sleepless nights.

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

What is the worst startup pitch ever?

Take your choice (these are both real, honest-to-God pitches, and I’ve got the originals in my possession):

Contestant A
CluelessCo is an internet startup company seeking $2 million of equity financing to fund our company for at least one year. CluelessCo will become the main consumer outlet for the internet, digital cable and satellite TV, and cell phones and PDAs. Read more