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Business Plan Exit Strategy
PAGE 4
Convertible Debenture
Another alternative often used in equity deals is the "convertible debenture." In this case, debenture means a loan, and convertible means the loan and the interest is convertible upon appropriate institution of the conversion as established in the by-laws and agreed to by the investor(s), to stock, either common or preferred. Often, a percentage of each is included. This method also offers the investor the most control as often times the trigger for conversion (given the company is public in some form) is set with milestones in the development of the company. For example, the first million in sales triggers a conversion of 25% of the debt to XX% equity in the company. In short, the debt is paid with stock. Convertible debentures are secured with promissory notes that detail the interest to be paid or accrued.
First Money In, First Money Out
Another method that requires more sophistication on the part of the investor
and the start-up is commonly called first money in, first money out. A
seed investor puts in capital, with the provision, understanding, and
contract so stipulating (in certain circumstances) that they are to receive
"x" return (interest), plus principle, as additional monies
are invested. The risk here is losing future investors who don’t
want their money to be used to pay back other investors versus helping
the company move forward. Often, this is the only way a start-up can get
the seed money it needs. And equally often, these "investments"
begin as loans in all reality.
A technique I've successfully used often is to cover all the bases in
the start-up plan, knowing that a negotiation for the ingestion of the
money will occur. Offer a detailed buyback offer, with credible evaluation
of the company at start-up, and leave an open end for a change instituted
by a vote of the Board of Directors for amending the by-laws of the corporation.
You do this in the "Proposed Transaction" section of the business
plan. This works especially well with closely held corporations.
JB, no matter what the exit strategy ultimately offered is, the most important concept to keep in mind when devising methods for exit is that the investors want their principle back, plus a return, in a period of time that's beneficial to them. Your company is just the vehicle to get from point A to point B.
Hope this helps.
Kent Capener of Capener Consulting.
Editor's Note: If you're craving more hands-on help with business plan aspects, take a look at Kent's helpful book, How To Write Your Own Professional Business Plan. It's an all-encompassing "how-to" including eighty pages of answers. Click here for details...
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