Question

At this point Time Hayden had done as much as he could with his personal credit cards and using his own cash. Now he needs $1 million to go to the next phase. He was able to get half of that through four corporations if he could raise the other half himself. He presented to a number of venture capitalist, however, it was his parents, friends and other who knew of him or one of the other investors. (PLEASE ANSWER ALL QUESTIONS)

Mini-Case Case Questions

Why might investors want a convertible note instead of getting stock in a start-up?

From the standpoint of the smaller investors, what are the advantages or disadvantages of having a single large investor (like one of the entertainment companies) along with the smaller ones?

If the large firms decide not to invest, what are the options available to Tim and how likely will he be to raise the capital needed?

Finally, what do you think is the answer to Tim’s question – what could go wrong now?

Answer 1

1) Investors want a convertible note instead of getting stock in a start-up because:-

a) They are not sure if start ups will make profits. So, if they have convertible note, they will be getting regular return whether company makes profit or not.

b) The convertible note allows investors to convert the amount of their loan, plus accrued interest, into equity at a reduced price relative to the investors in that subsequent round.

c) Also convertible note financing gets closed quickly and cost less in legal fees.

2)

The main advantage of having a large investor along with smaller ones is that they feel confident about their investment strategy. This is because since the large investor has invested his money in the start up, the small investors start feeling confident about the results of the start up.

Disdvantage of having a large investor is that he has most of the decision making power if his worth in the investment is more than 50% of total. Small investors will become minority in such case.

3)

If the large firms decide not to invest, Tim can raise the capital by using the following ways:-

a) Taking long term loans from banks.

b) Going for venture capital funding.

c) Attracting more small investors to raise the funds.

d) Asking underwriters to fund the business.