Choosing the Right Investment Structure

Feb 24

In this engaging episode of "Venture Declassified," hosts Mike Kelly, Ben Pidgeon, and Jacob Schpok unpack the various types of investment vehicles and the appropriate contexts for their use. The episode is loaded with expert insights into the nuances of safes, convertible notes, and equity financing, making it a must-listen for both budding entrepreneurs and seasoned investors.

Jacob outlines the main reasons why pre-seed and seed stages often employ safes and convertible notes, citing the difficulty in pricing companies at these early stages. Mike dives deeper into the topic, discussing the similarities and differences between safes and convertible notes, including the importance of cap rates and the implications of having or not having a maturity date. Ben contributes by explaining how the size of the investment can influence the choice of vehicle, emphasizing the balance between legal fees and capital deployment.

The hosts also explore more nuanced instruments, such as rolling closes and warrant coverage, providing listeners with a thorough understanding of when and why these might be used. Jacob and Mike engage in a spirited debate over the merits and pitfalls of these investment vehicles, offering contrasting perspectives. Mike's pragmatic approach is balanced by Jacob's principled stance, both underpinned by Ben's thoughtful moderation.

The episode wraps up with practical advice on navigating these financial instruments, making it an invaluable resource for anyone involved in venture capital or startup funding. Tune in to gain a comprehensive understanding of how different investment strategies can align with your entrepreneurial journey or investment thesis.

Key Topics

• Types of Investment Vehicles: Pricing the Round, Convertible Notes, SAFEs (Simple Agreement for Future Equity)

• Convertible Notes

• Precedent and Seed Stage Usage

• Difficulty in Pricing

• Potential Scenarios and Legal Aspects

• SAFEs

• Fundraising Speed and Simplicity

• Convertible Notes vs. SAFEs

• Convertible Notes’ Role in Different Rounds

• Merits and Demerits of SAFEs in Pre-Seed and Seed Stages

• Additional Investment Structures