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C Corps vs. S Corps vs. LLCs: Which Corporate Structure Should Angels Invest In?

The Venture Hype Team — Tue, 19 Jul 2011 18:00:57 +0000

Well, you have C Corps, S Corps, and LLCs. Do these differ, and if so, does the form of entity in which you invest even matter?

You bet it does. The differences in taxation, the flexibility in ownership, and the capital structuring among these three company structures can be significant.

C Corp., S Corp., and LLC: A Brief Introduction

C Corporation (C Corp.): Owners of a C Corp. are called “shareholders” or “stockholders.” As an investor, you’re a part-owner and are given stock certificates to evidence that ownership.

Additionally, from a legal perspective, a C Corp. is treated as a separate entity from its owners/shareholders. This separation shields you from debts or obligations the company may incur.

S Corporation (S Corp.): Like a C Corp., owners of an S Corp. are also called “shareholders” or “stockholders.” You, as a part-owner, are given stock certificates as proof of that ownership.

An S Corp. is also a separate entity from its shareholders, shielding you from debts or obligations the company may incur.

The main difference between a C Corp. and an S Corp. is how the income is taxed. We’ll expand the discussion of taxation later on in Part 3, “Company Structures and Your Tax Money.”

Limited Liability Company (LLC): Owners of an LLC are called “members.” Instead of stocks, you (as a member/part-owner of the LLC) receive “membership interest.”

This membership interest is usually expressed in percentages (e.g., a 10% membership interest) or in units (e.g., 10 units), which generally correspond to your percentage in ownership. [1]

Unlike shareholders of a C Corp. and an S Corp., who receive stock certificates to evidence ownership, LLC members receive charter documents, e.g., “Articles of Organization” and “Operating Agreement.”

An LLC also protects members from debts or obligations the company may incur.

Note: Although all three entities intend to shield members and shareholders from obligations incurred by the company, there’s no absolute guarantee that they will be shielded. Please consult with your lawyer.

What You’ll Learn in This Report

Which corporate structure has a high flexibility and why you need it
Which structure angel funds can’t invest in
2 reasons why seasoned investors don’t like to invest in this structure
Why experienced investors care about employee options
Which company structure allows you to make that agreement do whatever you want
Tax payments and tax filing requirements for C Corps, S Corps, and LLCs
Double taxation and single taxation and how they affect your investments
Losses in this company structure can be used to offset future company income, which will result in tax savings
Which structures may effectively lower your net investment and raise your internal rate of return
Which structures require you to pay tax even if the company hasn’t actually distributed any profits to you
Which structures require you to file a separate state income tax return in each state in which the company earns income
Which structures make individual tax reporting more complicated and slow
“One prominent angel” said he won’t invest in this structure because he was spending an inordinate amount of money on his personal tax returns
Which company structure do seasoned investors favor
You may cut half of your tax payment upon a liquidation event with this structure
Which structure allows you to roll the profits over into a future investment to postpone tax payments
Which structure can create significant issue with employees in technology companies
Which structure is better for employees in tech companies
You should invest in a C Corp. if you fit at least 1 of these scenarios
Why VCs typically don’t invest in this structure

Bonus

When you invest in this report, you’ll also receive a quick, easy-to-read 5-page report called “5 Reasons Seasoned Investors Prefer Companies Incorporated in This State” – a must-read for new angels and first-time entrepreneurs who are planning to raise money from professional investors.

What You Get

C Corps vs. S Corps vs. LLCs: Which Corporate Structure to Angel Invest in and Why the Form of Entity Matters (PDF report: 11 Pages | Word Count: 2,700+)
5 Reasons Seasoned Investors Prefer Companies Incorporated in This State (PDF report: 5 Pages | Word Count: 1,100+)

Available to Members Only

Angels and Startups, Don’t Play in China Until You Read This

The Venture Hype Team — Tue, 21 Jun 2011 18:00:15 +0000

Mobile will replace the computer in China. “To give you an order of magnitude, Chinese people exchange about 70 billion short messages – in a single month,” says Bruno Bensaid.

Based on the number of subscribers alone, China is definitely the number one mobile market in the world.

The Chinese people “are actually much earlier adopters than we think,” Bensaid continues. And there’s an explosion of apps for all sorts of phones in China.

The mobile market is huge, but is it profitable for startups and angel investors?

Bruno Bensaid

What’s the legal, operating, and funding environments like in China?

Did you know that the moment that a Chinese company accepts one penny, or one yuan, from a foreign investor, the status of the company could change radically?

Bensaid addresses these popular questions and many, many more in this interview.

If you’re a tech startup thinking of breaking into China’s humongous marketplace, or an investor itching to invest in the innovation hub that is China, you definitely don’t want to miss this information-packed series where Bensaid generously imparts his expertise in the mobile and Internet market in China.

What You’ll Learn

What foreign/Western startups must absolutely be aware of if they want to break into the China market.
The type of companies that have a completely unfair competitive advantage over foreign/Western companies.
The pros and cons of converting into a local company in China.
What investors need to know before pumping money into the burgeoning country.
The main configuration for angel or venture capital investment in China.
The differences between pure local and offshore local companies and why they matter to investors.
The easiest way to invest in Chinese startups.
Profitable angel investment niches to consider in China.

About Bruno Bensaid

Having had a vision that China would emerge as a technology and consumer powerhouse 15 years ago, Bruno Bensaid decided to learn Chinese and move to China. Ever since, he’s been deeply involved in China’s tech industry and has taken on various roles to help not only China, but also Europe and US’s startup and investment community.

As an angel investor, Bensaid primarily invests in young ventures through AngelVest, an angel group based in Shanghai, China.

As a mentor for a number of startup development programs, the latest one being Dave McClure’s startup accelerator 500 Startups, Bensaid helps incubated companies understand the Chinese marketplace and attract investment capital.

As a founding partner of Shanghaivest, Bensaid provides fundraising and strategic advice to early stage companies as well as fosters cross-border M&As between Chinese and European companies.

Bensaid is also the founder and organizer of Mobile Monday Shanghai, the most developed mobile industry-related community and event organizer.

What You Get

MP3: 33 minutes | 29.75 MB (refer to PDF for download instructions)
PDF: 24 Pages (Edited transcript + Quick Recap)
Word Count: 5,500+

What You’ll Learn

Why companies should have either angels or VCs as their funding source, but not both, and how the company’s decision would affect its angel investors.
Why the multi-hundred million dollar traditional VC funds don’t work in the 21st century.
Differences between venture capitalists and angel investors – some investors are calling themselves VCs but they really are angels.
What are capital efficient companies and in which sectors do these companies exist.
Why having a clear, written exit strategy almost from the earliest days is the most important goal for every externally financed company.
Some of the important elements that make up a good exit strategy – it’s much simpler than you think.
Myths, misperceptions, and outright lies about exits and mergers and acquisitions that often led boards and management teams completely down the wrong path.
What companies really need to do today to have a successful exit.
Why receiving an unsolicited acquisition offer is almost never good news.
The type of exits current economy favors.
New dynamics of the exit environment and the urgent requirement of having an exit coach.
Pressing challenges for entrepreneurs in today’s economy.
Whether angel investors should be optimistic or cautious about backing startups in the current economic climate.
And more…

Inside This Report

MP3: 34 minutes | 30.78 MB (refer to PDF for download instructions)
PDF: 29 Pages (Edited transcript + Quick Recap)
Word Count: 6,200+

Available to Members Only

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Startup Investing: What You Need to Know About Convertible Notes (2nd Edition)

The Venture Hype Team — Thu, 09 Jun 2011 18:00:39 +0000

“Startup Investing: What You Need to Know About Convertible Notes (2nd Edition)” is a fully updated version of the first edition, “Investing in Tech Startups: What You Need to Know About Convertible Notes.”

While both versions focus on using convertible notes as a pre-Series A deal structure, the new edition reflects on the usage of convertible notes in today’s funding and deal-making environment.

Due to the increasing popularity of using capped convertible notes in early stage deals, the 2nd edition contains new, updated sections that cover convertible notes with a price cap in more detail.

The updated version also contains new insights from seasoned investors and venture advisors; compares common usage scenarios of capped and uncapped notes; and more closely examines investment terms and includes example provisions drawn from sample term sheets.

The report is divided into seven parts:

Part 1, Introduction and Overview, covers the basics and overview of convertible notes, e.g., what they are and how they became popular.

Part 2, All About Uncapped Convertible Notes, explores the use of uncapped notes and discusses how deals were previously managed. This section reveals seven benefits of using convertible notes as a seed investment vehicle and seven pitfalls of the structure.

Inside Part 2

7 benefits and 7 pitfalls of the traditional convertible debt structure
How long it takes to close a convertible debt round vs. a preferred equity round
Legal fees for putting together a convertible debt deal vs. a Series A preferred equity agreement
Why the costs concerned seasoned investors, even though it’s the company that’s footing the bill
How open source, light Series A documents are intended to be used
Note holders’ position if the startup fails
Whether traditional convertible notes are truly a good compromise to disagreement on valuation
Why angels will end up hurting themselves financially if they help their portfolio company
How an angel note converts into equity and how big a slice the angel would own at different company valuations (with examples)
What is pre-money, new money, and post-money
Typical discounts for convertible debt deals
The fair discount range for most angel investments
The biggest risk factor for using uncapped convertible note as a seed investment vehicle
Why downside protections don’t really protect investors
How structuring the deal as convertible notes vs. preferred equity affect return on investment (with examples)
And more…

Part 3, All About Capped Convertible Notes, looks into capped notes in greater detail. Converts with a price cap is a relatively new structure that’s gaining popularity among experienced investors. This part focuses on what this structure is all about, how it affects conversion price, the more common range of capped valuations, and how it helps resolve the problems presented in the uncapped structure. Meanwhile, it also acknowledges the issues that this structure doesn’t solve.

Inside Part 3

What’s a convertible note with a price cap
The conversion price: discounted valuation vs. capped valuation (with examples)
The price point at which the valuation cap kicks in (with examples)
The ranges at which price caps are set (low, mid, and high)
The valuation cap for first-time entrepreneurs using the convertible note structure
Which benefits have capped notes retained from the uncapped structure
How a price cap can resolve some of the issues inherent in the uncapped structure
Which problems can a price cap solve
Whether a price cap, conversion discount, or warrant coverage is more beneficial
Why capped note isn’t a panacea
Downsides of the capped structure

Part 4, Using Convertible Notes: When and Why, further inspects why convertible notes are used, and the conditions and circumstances under which the use of capped and uncapped convertibles are considered appropriate.

Inside Part 4

Why do sophisticated angel investors use uncapped convertible notes
Why angels who don’t focus on ROI might end up hurting the startup community
Why angels use convertible notes instead of preferred stock
The time in which investors expect the company to raise an A round if the note is uncapped
Why smaller angels need to pay attention to terms even if other “famous” angels are in the deal
Which deal structure is more suitable for inexperienced angels and friends and family investors
Common investment round size for uncapped convertible notes vs. convertible notes with a price cap
What investors expect from convertible debt vs. traditional debt
Why the company needs to raise money if it’s so close to securing a VC investment
When do investors avoid using convertible notes
And more…

Part 5, Term Sheet: Terms and Provisions, the longest section of the report, first highlights the more “basic” investment terms and provisions that might appear in the majority of the term sheets. It then touches on the more “advanced” terms that might be proposed by angel groups and angel syndicates. This part also reviews how the terms might affect an angel investment.

Inside Part 5

21 “basic” terms (with example provisions) that may appear in the majority of term sheets
11 more “advanced” terms (with example provisions) that might appear in term sheets offered by angel groups and angel syndicates
How a company can make changes without everyone’s approval
The condition under which experienced investors would let the company tap into the funds while keeping the round open
Which closing condition is particularly important
The size of the discount and the ROI if the note converts
Typical warrant coverage, exercise price, and expiry date
The mechanism that allows warrants for Series A shares to be exercisable for common shares
The party that’s responsible for legal expenses
Legal expenses for angels who retain a counsel vs. those who don’t
Events that may trigger investors’ right to demand repayment of the debt prior to the maturity date
How important is interest rate in convertible debt deals
When do notes mature and the purpose of having a maturity date
How to prevent the company from taking the angels’ money to bridge to the A round, then kicks them out of the game when it no longer needs them
What might happen if the company isn’t required to raise a minimum amount that triggers an automatic conversion
Why there should be more than one conversion prices and when to use which
What should investors expect with secured notes
What’s the purpose of a subordination provision
Arguments for and against seed company having a Board of Directors
Circumstances under which taking Board seats are worthwhile for angels
An alternative if angels don’t want to have the liabilities that come with a Board seat
How to restrict entrepreneurs from performing certain actions without investors’ approval
How to prevent a company from shopping the deal
How to require the company to keep investors up-to-date
Which term might act as a veto right that stops a next round of financing
The formulations of pro-rata rights
How to prevent management from drawing a salary indefinitely as the business grows, while investors receive nothing
How to prevent a shareholder from selling shares to a competitor
And more…

Part 6, Scenarios and Events, goes over two scenarios and a total of seven events that might occur in the duration of the convertible debt deal. This part also discusses investors’ options in each event.

Inside Part 6

Investors’ options in 7 different scenarios: 1) the company might raise an A round after the note is due; 2) the startup has become a lifestyle company when the note reaches maturity date; 3) the company might get acquire or go public after the maturity date; 4) the company isn’t doing well when the note is due; 5) the company has a liquidity event before the note is due; 6) the company raises additional money but the amount is less than the minimum required to trigger a conversion; and 7) the company fails before the note falls due
Reasons why a note hasn’t been converted by the maturity date
Under what conditions would investors agree to auto-convert when the note falls due
Alternatives if the company is unable to repay the debt but investors don’t want to force it into bankruptcy
And more…

Part 7, Final Thoughts, closes and summarizes the entire report with some brief, final thoughts.

Bonuses

When you invest in this report, you’ll also receive two bonuses:

Basil Peters Debunks Outright Lies About Startup Exits and M&As

Includes a 29-page PDF report and a 34-minute MP3 download
Why companies should have either angels or VCs as their funding source, but not both, and how the company’s decision would affect its angel investors.
Why the multi-hundred million dollar traditional VC funds don’t work in the 21st century.
Differences between venture capitalists and angel investors – some investors are calling themselves VCs but they really are angels.
What are capital efficient companies and in which sectors do these companies exist.
Why having a clear, written exit strategy almost from the earliest days is the most important goal for every externally financed company.
Some of the important elements that make up a good exit strategy – it’s much simpler than you think.
Myths, misperceptions, and outright lies about exits and mergers and acquisitions that often led boards and management teams completely down the wrong path.
What companies really need to do today to have a successful exit.
Why receiving an unsolicited acquisition offer is almost never good news.
The type of exits current economy favors.
New dynamics of the exit environment and the urgent requirement of having an exit coach.
Pressing challenges for entrepreneurs in today’s economy.
Whether angel investors should be optimistic or cautious about backing startups in the current economic climate.
And more…

Angels and Startups, Don't Play in China Until You Read This

Includes a 24-page PDF report and a 33-minute MP3 download
What foreign/Western startups must absolutely be aware of if they want to break into the China market.
The type of companies that have a completely unfair competitive advantage over foreign/Western companies.
The pros and cons of converting into a local company in China.
What investors need to know before pumping money into the burgeoning country.
The main configuration for angel or venture capital investment in China.
The differences between pure local and offshore local companies and why they matter to investors.
The easiest way to invest in Chinese startups.
Several potentially profitable investment niches for angel investors.

What You Get

Startup Investing: What You Need to Know About Convertible Notes (2nd Edition) [PDF report: 93 Pages | Word Count: 23,000+]
Basil Peters Debunks Outright Lies About Startup Exits and M&As [PDF report: 29 Pages | MP3 download: 34 minutes]
Angels and Startups, Don’t Play in China Until You Read This [PDF report: 24 Pages | MP3 download: 33 minutes]

Available to Members Only