Dilution: Priced Rounds vs Convertible Notes

There have been many posts by investors articulating the issues with convertible notes. Most recently, Fred Wilson wrote that one of his main issues with notes is that they “obfuscate the amount of dilution the founder(s) is taking.”

While there are more aspects of notes that entrepreneurs may not think about (see Fred’s post) I will solely focus on dilution for this post. I build out 2 examples (equity vs. notes) and 2 rounds within those examples (“pre-seed” and “institutional seed” rounds).

Example 1: Equity

Terms: $1M at $3M pre-money valuation, 20% employee option pool.

As you can see, the Founding Team owns 55% of the Company after the round. The rest of the cap table is clean and everyone knows exactly what they own.

Now, let’s assume that, about 18 months from Round 1, the Company demonstrates enough traction to raise a $2M round at a $6M pre-money valuation. The investors set the option pool to 18%, to be reflected in the pre-money share count (ensures new money in doesn’t get diluted by increase in option pool). Round 1 investors also take their pro-rata.

At the end of the 2nd round, the Founding Team owns 39.19% of the Company.

Example 2: Convertible Note

Round 1 Terms: $1M at a $4M valuation cap; 20% discount on the next round; 7% interest; 20% employee option pool at Company formation.

Here, the cap table reflects the investment (as debt), but does not effect ownership of in the Company. The Founding Team owns 80% on the cap table, but in reality it is somewhere much less than that (most likely around 55%). Depending on a variety of factors, though, the Founders really do not have a clear idea of how much of the Company they own. And as many have noted, this puts the Company in a slightly precarious situation.

Now, about 18 months later, the Company raises an equity round with the same terms as Example 1: $2M at a $6M pre-money valuation. In this case I simply doubled the employee option pool (which results in the same 18% ownership in this specific example).

Round 1 Investors converted at the $4M cap as opposed to the 20% discount. The Founding Team, though, end up with 36% of the Company, whereas in Example 1, they ended up with 39%.

The difference then, at the same terms, was ~3% extra dilution by taking a convertible note instead of equity.

This 3% can be substantially increased if founders take on more capital on the notes, offer a lower cap, or a larger discount. In a few different permutations of this model, the delta ended up being 6%-8%.

At the end of the day, the fact that founders are taking “extra dilution” is not the problem. It’s the fact that many aren’t realizing it. And when it comes to the date when this is realized, it can understandably be extremely unsettling.

So, if you’re a founder and want to play with the different scenarios, feel free to reach out to me and I can share this model with you.

Dilution: Priced Rounds vs Convertible Notes

ID.me closes $19M led by FTV Capital

This article originally appeared on the Washington Post and can be found here

Signing into web pages is almost universally known as one of the most annoying parts of the Internet.

Most people either have keep a separate list of every password needed to log into each different platform, or use one or two passwords for everything, something that security experts say emboldens identity thieves.

A number of gigantic technology companies are trying to find a simpler way.

Companies like Facebook and Google let users log into multiple products with the same username and password. And a growing pool of companies is gunning to create a system that works across numerous products. Providing this sort of identity verification across various web pages requires certain certifications, attracting a limited pool of mostly large technology companies including Verizon and Symantec.

But alongside these big companies, a little start-up called ID.me is betting on the the idea of an all-encompassing electronic sign-in. Originally founded as a sort of military-focused daily deals company, then named TroopSwap, the company now has a $19 million war chest to focus singularly on managing people’s identities.

“We think it’s a fundamental problem that digital identity is in the hands of two advertising companies, Facebook and Google. That clearly is not OK,” said chief executive Blake Hall.

“What we really want to do is create a ubiquitous ID network whether its ID.me or somebody else.”

ID.Me said Wednesday it has raised $19 million from FTV Capital, a San Francisco-based private equity firm, with another $21 million planned for later. Financial details were not disclosed, but Hall says the company making the investment would not have a controlling stake in the business.

Blake’s company is building an online network where people — or the businesses that ID.me contracts with — can upload specific forms of credentials needed to identify an individual for a specific purpose. For most problems, that involves a relatively limited pool of identifying factors, minimizing the amount of sensitive data that might be exposed.

ID.me embarked on this new line of business in 2013 after experimenting with other business models in its early days. After the TroopSwap daily deals business sputtered, the company re-branded as TroopID, with a new plan to make it easier for troops to identify themselves online to claim things like medical benefits.

That toe-hold in the market for online authentication services preceded the broader market the company is now targeting.

Hall says the new funding will be used to build out a sales and marketing force that went largely ignored in the company’s early days.

The young company has 253 customers, most of whom are large e-commerce sites that use ID.me’s technology to identify millions of users. Hall declined to disclose financial details, but said the company’s revenue more than quadrupled last year and is projected to be “in the eight figures for sure.”

ID.me closes $19M led by FTV Capital

Brad Harrison on Venture Studio

Brad Harrison recently had the opportunity to sit down with Dave Lerner on Venture Studio, where the two discussed investment philosophy, NY tech, Olapic, and much more. We highly recommend giving it a listen (37 minutes).

Dave is a serial entrepreneur with 3 exits, angel investor in 70+ companies and the host of Venture Studio, a popular podcast where I interview some of the most interesting investors and personalities in NYC tech and beyond. He is also the Director of Entrepreneurship at Columbia University, Adjunct Professor of Entrepreneurship at Columbia Business School and was the Director of Columbia’s Venture Lab for seven years where he spun-out 70+ technology start-ups based on university research.

 

Brad Harrison on Venture Studio

NYC VC 2017

Be Happy

On a daily basis, I am inspired by blogs from the likes of Fred Wilson (AVC) and Brad Feld (Feld Thoughts) who consistently publish insightful and educational pieces for entrepreneurs, investors, and anyone who wants to better understand early stage investing and current technology trends.

From this inspiration, I’ve committed to be a more prolific writer in 2017 and beyond.

This morning, I was talking to a long time friend, advisor, and co-founder of Everplans, Adam Seifer about the ever changing landscape of early stage investing.

Specifically, we were discussing how NYC was become a more competitive market, with many of the micro-VCs now writing bigger checks ($500k-$1M) leaving less room for other firms and angels to participate in the seed round.    Most of the micro-VCs have well defined investment thesis’ and thus look to take a big position in early stage companies that fit their profile.

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NYC VC 2017

Digi International Acquires IoT Cold Chain Provider FreshTemp

Original post can be found here.
Acquisition Broadens Temperature Monitoring and Adds Digital Task Management Solutions for the Cold Chain and Food Industry

MINNETONKA, Minn., Nov. 2,  2016  –  Digi International®, (NASDAQ: DGII, www.digi.com), a leading global provider of machine-to-machine (M2M) and Internet of Things (IoT) connectivity products and services, today announced the purchase of FreshTemp, a provider of  temperature monitoring and task management solutions for the food industry. The acquired technology will continue to be supported, as well as leveraged within the Digi HoneycombTM solution, to create an advanced portfolio of products for the cold chain market. Terms of the transaction were not disclosed.

Founded in 2011 by CEO Jeff Rieger, FreshTemp has been a pioneering company in creating technology, services and domain expertise in complete food safety and operations management for commercial kitchens. With this acquisition, Digi Cold Chain Solutions will expand its temperature monitoring solutions to incorporate digital task management capabilities to replace traditional manual logbooks and simplify daily restaurant tasks. Organizations will be able to streamline manual operational checklists and provide insight to managers on how well their teams are adhering to restaurant guidelines. As part of the acquisition, Mr. Rieger and FreshTemp employees will become part of the Digi Cold Chain Solutions team.

“Our solution sets are extremely compatible and I’m excited to be able to leverage the market presence and scale that Digi offers our customers,” said Jeff Rieger, founder and chief executive officer of FreshTemp. “Together, we’ll be able to accelerate the adoption of our solutions and support the growing demand for technology that ensures businesses are serving safe and quality food.”

“We believe the cold chain market represents a large underserved market that can take greater advantage of wireless sensor networking and IoT capabilities,” said Ron Konezny, president and chief executive officer, Digi International. “We’re going to leverage all avenues – organic growth, partnerships, and acquisitions – to further establish Digi as the expert in providing easy to use and ROI generating cold chain solutions.

Since its introduction, Digi Honeycomb has been deployed in a number of leading quick service restaurants, and has established itself as a leading solution through partnerships such as those with TELUS, Canada’s fastest-growing national telecommunications company.

Digi Honeycomb is an automated food temperature monitoring service that encompasses front-of-house and back-of-house environments to alert users if the proper temperature is not maintained. FreshTemp’s core product line as well as task management capabilities will be made available through Digi Cold Chain Solutions.  As a result, organizations in the food industry will be able to address major operational challenges. For more information visit: http://www.digi.com/cold-chain-solutions.

About Digi International 
Digi International (NASDAQ: DGII) is a leading global provider of business and mission-critical machine-to-machine (M2M) and Internet of Things (IoT) connectivity products and services. We help our customers create next-generation connected products and deploy and manage critical communications infrastructures in demanding environments with high levels of security, relentless reliability and bulletproof performance. Founded in 1985, we’ve helped our customers connect over 100 million things, and growing.

Digi International Acquires IoT Cold Chain Provider FreshTemp

Beyonce Invests in Sidestep

This post originally appeared on TechCrunch and can be found here

Joining celebrity investors like Snoop Dogg, Ashton Kutcher, and Justin Bieber, Queen Bey is bringing her supreme business skills to the tech world. Beyoncé and the management company she started called Parkwood Entertainment have invested $150,000 into Sidestep, an app for buying concert merchandise and skipping the line to pick it up at the show.

Sidestep originally started selling t-shirts and posters for Beyoncé on her Formation World Tour. But after two weeks of seeing its success, Beyoncé and Parkwood invested in Sidestep’s seed round of funding.

Sidestep CEO Eric Jones tells me they “wanted Beyoncé’s tour to be very focused on tech”, and liked the idea of “a tiny scrappy startup doing the biggest tour in the world.”

beyonce_store

Beyoncé previously invested in WTRMLN WTR, a watermelon beverage company. She’s believed to have ties to juicing machine maker Juicero, though that company refuses to talk about their relationship. [Update: Beyonce helped start vegan food company 22 Day Nutritionas well.] She’s also a stakeholder in streaming service Tidal thanks to her agreement to give it early access to her music. With her investment in Sidestep, though, she could directly help artists earn more money.

Musicians hoping to get rich off skimpy streaming royalties are kidding themselves. The real money is in using streaming to get famous and then selling concert tickets and merchandise.

But due to long lines and, you know, wanting to actually see the show, many people avoid buying t-shirts and other merch at concerts. That’s where Sidestep steps in.

The startup lets you order tour merchandise before, during, or even after the show from its smartphone app. You can then Sidestep the merch booth line, flash a QR code at the dedicated pickup spot, and grab your items in seconds. Or you can have them delivered to your home. This way you can be sure to get whatever stuff you want in the right size with no fear of wasting time or it selling out.

Along with Beyoncé gear, you can buy merch from artists like Guns N’ Roses, Fall Out Boy, Selena Gomez, and Weezer via Sidestep. The startup gives artists a ton of data about who’s buying, and keeps a 10% service fee charged to the customer.

logo

Sidestep has raised a total of $1.7 million from Beyoncé and other investors including actor Jared Leto, former Lady Gaga manager Troy Carter and Cross Culture Ventures, and the previous CEO of the LA Dodgers. The app has done over $2 million in sales, up 10X from last year. The company competed in TechCrunch’s 1st And Future sports startup hackathonearlier this year. 

Sidestep will have to compete with other merchandise startups like Merchbar, an Amazon-like webstore, and Yoshirt, which lets fans design custom items with a band’s logos and photos. and some people might rather stand in line than pay 10% extra. But with streaming royalties still unable to make up for the drop in album sales, artists will do whatever they can to sell more shirts, and these startups could flourish.

Meanwhile, top performers like Beyoncé who invest will start stackin’ money in Silicon Valley, not just Hollywood.

Beyonce Invests in Sidestep

Welcoming Nisa Amoils

Be Happy

I am very pleased to formally announce that we’ve added Nisa Amoils to the Scout family as our newest Venture Partner. Nisa is an experienced attorney, media executive, and noted tech investor in the New York community. She has spent many years at companies pursuing entrepreneurial projects, including Time Warner and NBC Universal. She is also a regular judge/panelist on CNBC, MSNBC and Fox and a mentor at XRC Labs, Grand Central Tech and The Vinetta Project. Nisa’s background demonstrates the entrepreneurial and investing ethos that we admire and strive for at Scout.

Over the past six months, we’ve been working very closely with Nisa around expanding our efforts in frontier tech. She has proven to be incredibly insightful and her deep domain expertise in digital media, marketplaces and frontier tech make her the perfect addition to the team. Nisa will be leading our efforts investing in drones, AI, and…

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Welcoming Nisa Amoils