Kate Moss is Not an Accredited Investor
According to Brad Feld, investors like Kate (unaccredited investors) are "your garden variety mess." I've learnt by study, observation and mistaken assumptions there is a major difference between the Billion Dollar Home Run Startup, that burns through Tier A venture capital ($1m-$25m) as it attempts The Big American Dream, and a Corner Store small to medium sized early stage, innovative 'local' business, that has some early stage financing needs (eg $10k-$200k) till it reaches breakeven (usually with 12-18 months) and beyond.
"This" 2.0 time there seems to be more of the finance and build it yourself, gain market position, and see if you can hold on till GEMAYA come along and lighten your code load, and reverse the red in your bank account. Entrepreneurs, as one eyed, passionate and obsessed as they are, need to take a step back from there business and know which one they are. Which one they want to be. And decide their shareholder pathway accordingly. From what Jeff Clavier and Brad Feld are saying, there is no as Michael Porter said "being stuck in the middle". The scary part with conversation that Billion Dollar Startups need "accredited investors" is how the heck are you supposed to get going at Point Zero of a new business, when its just a raw, uncultivated concept, which the (probably employed) entrepreneur to be, cannot shake or stop thinking about, and thinks 'maybe, just maybe' this could be a goer. (dreams of quitting job, being their own person, finally doing it right)
At the start of the road which every entrepreneur says they wouldnt take again if they knew what it was going to entail (ok they would :) one starts working at the idea at night, on weekend, and soon it takes over everything, maybe even work hours. At which point a decision needs to be made. If it hasnt been made from external forces. (how many businesses are started after a long corporate stint for instance with an idealistic "I can do it better" Jerry Maguire moment) So the entrpreneur to be, after annoying wife/husband, friends, the family accountant (who thinks it's a bad idea) says "I'm going to write a business plan" and I'll go speak to Bob about getting some money for this." (right after deciding to draw down some equity on the family house to co-fund) So off to Bob we go, who previous XMAS' has intimated he'd fund any business idea we had, and wouldnt it be great to do a business together (he's getting bored with his flying lessons)
The Problem : "Friends and Family" are the Founding Investors in nearly all small businesses and Billion Dollar Home Runs. So what I dont' understand with the current discussion (past getting your legals in order, and ensuring the right shareholder structures at different stages are upheld), how the heck does one fund a business at point zero without Friends and Family who are often 'unaccredited investors'.
Entrepreneurs wanting to be the next Google, or company acquired by, compared to say just another millionaire with a nice little earning corner store online, better send the below links to their lawyer : But watch out, if you send it to your lawyer friend, they also might not be accredited.
Jeff Clavier : "Not complying with this rule, which means – yes – turning money down, will come back and haunt you down the road when it is time to further finance or sell your company."
Brad Feld : "What happens on an acquisition? Regardless if the placement was done correctly to the unaccredited investors, an acquisition of the company could pose big problems. Take the case where a private company acquires the company for stock. Handling the unaccredited investors can be extremely difficult. The unaccredited investors need a purchase representative to trade their stock for the acquiring company stock, or the stock needs to be registered or subject to fairness hearings. Alternatively, the buyer will insist that they don’t want unaccredited investors holding stock in their company, in which case the seller needs to come up with cash to buy out the unaccredited investors. We’ve seen cases where the buyer completely refused to deal with the unaccredited investors and the accredited investors on the seller’s side had to invest new cash in the company to buy out the unaccredited investors. Public company acquisitions can present similar problems if the stock being issued in the acquisition is not registered. Basically, your garden variety mess."
"This" 2.0 time there seems to be more of the finance and build it yourself, gain market position, and see if you can hold on till GEMAYA come along and lighten your code load, and reverse the red in your bank account. Entrepreneurs, as one eyed, passionate and obsessed as they are, need to take a step back from there business and know which one they are. Which one they want to be. And decide their shareholder pathway accordingly. From what Jeff Clavier and Brad Feld are saying, there is no as Michael Porter said "being stuck in the middle". The scary part with conversation that Billion Dollar Startups need "accredited investors" is how the heck are you supposed to get going at Point Zero of a new business, when its just a raw, uncultivated concept, which the (probably employed) entrepreneur to be, cannot shake or stop thinking about, and thinks 'maybe, just maybe' this could be a goer. (dreams of quitting job, being their own person, finally doing it right)
At the start of the road which every entrepreneur says they wouldnt take again if they knew what it was going to entail (ok they would :) one starts working at the idea at night, on weekend, and soon it takes over everything, maybe even work hours. At which point a decision needs to be made. If it hasnt been made from external forces. (how many businesses are started after a long corporate stint for instance with an idealistic "I can do it better" Jerry Maguire moment) So the entrpreneur to be, after annoying wife/husband, friends, the family accountant (who thinks it's a bad idea) says "I'm going to write a business plan" and I'll go speak to Bob about getting some money for this." (right after deciding to draw down some equity on the family house to co-fund) So off to Bob we go, who previous XMAS' has intimated he'd fund any business idea we had, and wouldnt it be great to do a business together (he's getting bored with his flying lessons)
The Problem : "Friends and Family" are the Founding Investors in nearly all small businesses and Billion Dollar Home Runs. So what I dont' understand with the current discussion (past getting your legals in order, and ensuring the right shareholder structures at different stages are upheld), how the heck does one fund a business at point zero without Friends and Family who are often 'unaccredited investors'.
Entrepreneurs wanting to be the next Google, or company acquired by, compared to say just another millionaire with a nice little earning corner store online, better send the below links to their lawyer : But watch out, if you send it to your lawyer friend, they also might not be accredited.
Jeff Clavier : "Not complying with this rule, which means – yes – turning money down, will come back and haunt you down the road when it is time to further finance or sell your company."
Brad Feld : "What happens on an acquisition? Regardless if the placement was done correctly to the unaccredited investors, an acquisition of the company could pose big problems. Take the case where a private company acquires the company for stock. Handling the unaccredited investors can be extremely difficult. The unaccredited investors need a purchase representative to trade their stock for the acquiring company stock, or the stock needs to be registered or subject to fairness hearings. Alternatively, the buyer will insist that they don’t want unaccredited investors holding stock in their company, in which case the seller needs to come up with cash to buy out the unaccredited investors. We’ve seen cases where the buyer completely refused to deal with the unaccredited investors and the accredited investors on the seller’s side had to invest new cash in the company to buy out the unaccredited investors. Public company acquisitions can present similar problems if the stock being issued in the acquisition is not registered. Basically, your garden variety mess."
posted by redbarren at 10:47 AM
4 Comments:
Why is it that we have no problem believing that a company can index the whole internet, or that one of the best sources for truth could be created via volunteers, but to think that 300 average people could pool their funds to act like a VC, we get all scared?
Look at what’s happening in the music industry, the internet is just as much about rethinking our legal norms as it is about anything else.
The accredited investor problem will be solved soon.
-bruce
For some strange reason the
government is under the impression that just because someone has money, it means that they must be able to understand and analyze investment choices!
There should clearly be an updating of the current rules and regulations
that more realistically reflects the true definition of a "sophisticated
investor" and takes into account knowledge, intelligence and education.
Richard Rudy,
Stillwater Asset Backed Lending Division
An investor is qualified as accredited is he/she earns over $200K or have networth of over $1M. At the same time a private business may be allowed to also get up to 35 non accredited investors that must be financially sophisticated (able to evaluate risks and merits of an investment). There are companies that do investment surveys to pre-qualify investors for accreditation or sophistications. Check into FNIN surveyed investors or the BreadStreet Documented Investors (http://www.breadstreet.com )
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