2 min read At TEN Capital, we see several startups that are strong candidates for early exits.
In looking at the history of angel groups and startup investing, a typical portfolio yields the following: the top 10% are big winners, 15% are medium winners, the bottom 10% go out of business, and the remaining 65% turn into lifestyle businesses that may be providing a nice income for the founders but will never provide a return for the investors.
As an investor, I found it irksome to fund someone else’s lifestyle business. The startup often envisioned a high growth company but couldn’t find the growth rates or additional funding to achieve it.
It was then that I decided to introduce the redemption right into the negotiations.
It’s a convertible note structure that provides a 3X in 3 years (terms vary for some deals) redemption right at ‘investor sole discretion’, which means the investor has the right to ask for 3X the investment at the 3-year mark. So $100K investment would return $300K.
These terms work well for startups with revenue and strong growth rates, but doesn’t make sense for pre-revenue startups or companies still looking for traction.
If the startup is growing well at year 3, the investor can forego the redemption and stay for the equity exit.
If the startup has turned into the “lifestyle” business discussed earlier, then the investor has an exit path.
When I talk with startups about their exit plan (IPO, M&A, etc.), it’s frequently a vague and fuzzy conversation. When I put a 3X in 3 years on the table, it turns into a real and focused discussion.
Those on the growth path can pursue it; those that aren’t typically won’t.
Hall T. Martin is the founder and CEO of the TEN Capital Network.TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: firstname.lastname@example.org