Death of the Hockey Stick
Posted by Dr. Earl R. Smith II in Blog, Venture Capital, tags: adviser, advisory board, angel investor, board of directors, CEO, chairman, coaching, consulting, director, earl r smith ii, earl smith, Executive Coaching, federal circle, federal contracting, funding, Governance, government contractor, investing, investment, investor, Leadership, leadership assessment, leadership coaching, leadership development, leadership styles, management assessment, managing partner, Personal Growth, the federal circle, turnaround, Turnaround Management, Venture CapitalDr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
A recent phone conversation drifted into the question of valuation for start-up and early-stage companies. My own opinions on the matter have been formed through work with many such companies and on behalf of many investors in them. 
The ‘traditional’ approach to allocating equity between investors and management breaks down regularly – with both sides more than occasionally feeling that they are getting the short end of the stick. Some years back, I had the opportunity to try a completely different approach. The company had been taken through bankruptcy and 100% of the equity was held by the investors. Out of that situation, a new method of allocating equity emerged – one that seems to work very well even in the more normal situations of investors participating in start-ups and early-stage companies. Here is the thumbnail:
In my view, the correct valuation for early-stage funding is the sum of the investment plus a small amount for the founders. I then structure an earn-in program that allows the senior team to accumulate equity based on performance against pre-agreed to metrics. These programs can allow the team to achieve controlling interest in the company. I like this approach for two reasons. First, it virtually assures that projections are achievable in the eyes of management. The days of ‘promoting’ investors into a deal using hockey stick projections quickly fades away. Second, the plans allows investors to maintain a steadily increasing value while splitting the value created by the founders and management between the two interests.
© Dr. Earl R. Smith II
Related Articles:
-
Making the Possible Probable
-
Finding a Mirror – Realizing
-
Just Couldn’t Bring Himself …
-
Moving the Ball
-
Knowing Versus Doing – Post-Success Malaise
-
Non-Cumulative Relationships
Dr. Smith is Managing Partner of The Federal Circle. The Federal Circle partners with teams and existing companies. We help them up their game and win big in the Federal space. We also arrange funding for acquisitions and expansion by acquisition. Our model is based on the belief that, if you select the very best and work with them in a highly professional and focused manner, the results will be truly amazing. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.
Entries (RSS)