This has been a strange week for me. BBC Breakfast has been running a series on Happiness and what leads to it. The conclusions seem to be that people are happier through showing acts of kindness and spending time with each other rather than through accumulating money or assets. This week I took part in Seedcamp for the second time. It was exhausting and does involve giving up a lot of your time – and none of the mentors get paid for this. I also have to say I am feeling very happy right now (despite having the usual problems that all of us have to fight daily). It was only when I saw the conclusion on BBC this morning did I make the connection between the way I felt and the fact that I had given something back to the entrepreneurial ecosystem. There are too many ‘grubby’ things out there where lots of people of little or no talent try to make money off the back of incredibly hard-working and risk-taking entrepreneurs and it makes me angry when I hear some of the stories around this. Entrepreneurs are the new rock stars of the moment and there are so many organizations that claim to exist to support them. Unless you are in the business of investing or mentoring, you are not helping. It is as simple as that. And if you are in the business of investing, be clear, honest and transparent about your cost structure.
Seedcamp has created a great eco-system where lots of mentors give up their time for free. The companies pay nothing to be there and benefit from the advice given. I was able to mentor a few companies, and I was pleased with the feedback (not about me, but the Seedcamp process). There is nothing more disheartening than to give your advice to people who don’t want it (even though they ask for it!). This is what I as a mentor thought was brilliant about Seedcamp companies – they all wanted advice and took it on board. This compares with two companies that asked for advice and did not turn up for pre-booked meetings that I met through a different forum (still not had an apology from one of them!) Back to my main point, I would encourage an yone with experience in the digital space to try and get involved in Seedcamp as a mentor. It is a great experience, you will meet great people and companies who will value your input. And as the BBC proved this week, giving your time to this will make you happy – I promise you.
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My last post led to me getting a phone call from one of the best Angels I know on the London scene at the moment making some very important points. I promised that I would write a blog about the points that came out of the conversation. 1. The importance of tax considerations. One of the big drawbacks of using loan instruments (such as convertible notes) is that it does not attract EIS relief. EIS is a very big deal for investors and given the likelihood of failure, for a very good reason. And of course, with tax increases, the potential upside EIS very attractively. 2. From a security point of view, convertible loan notes only make sense if the underlying business you are investing in has assets. For example, investing in a company in the digital space will mean that upon a liquidation event, you will probably not receive any proceeds from disposal even though you have a ‘loan’. 3. A conversion formula only makes sense if the conversion ‘event’ is in the short term (within 18 months). The example given was the following An angel investor puts £100,000 into a pure start-up in the digital space. The investment is made at a 30% discount to the next liquidity event convertible loan note formula. At this stage, there is nothing but a business plan. No revenues to speak of etc. The business quickly grows and does not require any more funding. The business is then sold after five years for £5m. The investor then receives the £100,000 note back along with 30% extra. There is no conversion to take place as the shares are all being bought. A 30% return on a very high-risk investment when there was nothing to back seems very low. It will grate even more when the founder walks away with £4.9m! You would agree that this does not seem like a fair split of the risks and rewards. My colleague also uses an interesting cap and collar mechanism. This mechanism ensures that both the company and the investor are protected on the downside and the upside. |
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