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February 28, 2009

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Will this work for a pure service business?

Here's another question...can this work with venture capitalists...or is it just for angel investors?

Peter, I just finished it and found it very helpful. Is there any way to purchase an hour of your time to discuss a related issue?

To answer your questions:

1. Yes, it will work with service businesses.

2. Venture capitalists have their own way of structuring deals, so this instrument won't help you with them. It's for angel and business investors.

I'm a member of Common Angels, a relatively experienced and large angel investment group in Boston.

I agree that it's awful when investors drag their heels and don't really give you a "no" when that's what they really think. Common Angels has three full-time staff members: two executive directors plus an administrator. The executive directors are very professional and get back to everyone promptly. (I.e., not all angels groups are the same.)

I've never heard of the kind of deal structure you seem to be talking about. Why should the company pay back the investors monthly, like a mortgage? The whole point of that money is to provide working capital for the company, so it can grow. If you want to give them less money, do that from the start.

But I have not read your pamphlet so of course I am in no position to make serious comments on it.

Daniel,

The instrument, called a Revenue Royalty Certificate (RRC), is a loan structure which clearly demonstrates to the investor how and when they will recover both their principal and profit while also receiving an equity stake in the company. It's a hybrid instrument combining both debt and equity.

It provides capital to a company for a pre-agreed upon time period which can stretch anywhere from months to years. On top of that, it's highly flexible meaning that it can be customized to meet the needs of both parties.

RRCs have been used for decades because they solve the problem of, "How and when will I get my money back?"

Hi,
I've been Angel investor with my partners for several years and have successfuly invested and done it in a timely manner. I have 2 points to make: One about you RRC proposal and Second about what type of Angel investor any entrepreneur should form a relationship with.

First let me talk about the second point. The Angel investor of choice should be one who is with enough savvy as an investor, not just greed! Don't confuse investor greed with savvy. Any investor who wants to get in at an early stage is taking a big gample, of course, but also must realize that as soon as he/she is in with the investment, he is part of the venture in many ways. He now has to facilitate next round of funding when it is necessary, not be an obstacle!! So any terms that hinder the future finacing deals that the investor demands is not worth having! It is a bad "money" to have. We have been early stage investors in most cases and also commited to 1st, 2nd round financing as well. So DO NOT GO WITH AN INVESTOR WHO JUST WANTS TO GO IN FOR SEED ROUND OF FINANCING. Then you must tell the investor that the next round investors will also get A shares if required and he has to go along with it. This is just a small sample of many issues that must be considered. Anyway, you dont want an investor who has limited resources to be a seed investor because he could hamper your future rounds big time!!!

Now about 1st point. Why do I want to give an investor Revenue Royalty Certificates? The money that he put in is for use as part of the operation, not make him feel good and comfortable about the investment. It is his job to do proper DD and then make investment, "jump in with both feet, not just dip his toe in the water". I wouldn't want this kind of investor at all. Plus the loan screws up the balance sheet big time. Why do I want to do that? I want to show some equity in the company, not debt. So I respectfully say that RRC is not a good idea. Sorry!

Royalties are off-balanace sheet items.

Nandu, see Cam's reply.

I believe you need to consider the type of business needing the capital, and the needs of the potential provider of funding. If the business is high tech with a great product, the odds are in favor of straight equity. However, some startups don't have the great product and offer little prospect of a big return. So, an off-balance sheet debt financing may be useful.

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