Preparing for Funding Ep5: Initial Sophisticated Investors – Recut

Office Hours is our podcast covering general issues related to small businesses and startups. Preparing For Funding is a series of Office Hours episodes hosted by VW Partners Kevin Vela and Rad Wood about getting your company’s legal house in order before taking on funding. We are recutting this series to reflect updates in law and venture trends in the last 5 years to better help you navigate through preparing for funding.

In this episode, we discuss the difference between accredited, unaccredited, and sophisticated investors, and where to find them.

Time Stamps

  • 2:33 – Importance of Friends and Family Round
  • 5:07 – The Hustle
  • 7:47 – Issuing Securities 
  • 8:35 – Accredited Investors
  • 12:29 – Sophisticated Investors
  • 16:00 – Where Do You Find Investors?

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Click here to view terms used in this podcast

An Accelerator is a program whose intent is to “accelerate” the development of startups. Typically an accelerator will last one to three months and aims to provide support to startups through small amounts of seed capital, mentoring, training, and events for a finite period. It is common for an accelerator to receive some equity in the participating companies in exchange for the company’s participation in the program.

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Accredited Investor

Accredited Investor is defined under the Securities Act of 1933. Anyone (individual or entity) who meets the definition is able to invest in certain private offerings. Simply put, an accredited investor is an individual with a net worth (individually or with a spouse) of at least $1,000,000 exclusive of a primary residence, or who has earned at least $200,000 individually, or $300,000 jointly with a spouse in each of the last two years. There is also a long list of ways that an entity can qualify as an accredited investors.

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Angel Investor

Angel Investors are individuals who provide seed or startup finance to entrepreneurs. In addition to an investment, angel investors may also provide industry contacts and knowledge.

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A Broker-Dealer is an individual or firm that buys and sells securities or acts as an intermediary for such sales.

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Capital Raise

A transaction or series of transactions whereby a startup raises investment dollars (or “capital”) to grow the company. Capital raises can be debt, convertible debt, or equity.

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Demo Day

Demo Day is “pitch day,” or when startups in an accelerator pitch to investors.

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Early-Stage Financing

Early-Stage Financing refers to investments that happen early in a company’s lifecycle.

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Finder’s Fee

A Finder’s Fee is a commission paid to a third-party for facilitating successful transactions, whether acquisitions or M&A, between a startup, investors, or potential partners.

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Free Cash Flow

Free Cash Flow is a financial metric illustrating cash that the company has on hand to fund the growth of the company or distribute to security holders.

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Friends and Family Round

A Friends and Family Round is the first round of funding for a company that consists of obtaining capital from founders’ friends and family.

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An Incubator is an entity designed to develop business ideas and/or new technology to the extent they become attractive to venture capitalists. An incubator typically provides physical space and some or all of the services needed for a business idea to develop.

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Institutional Investor

An Institutional Investor is an entity with large amounts of resources that invests significant amounts of money on behalf of individuals and companies. Institutional investors are typically investment companies, mutual funds, brokerages, and insurance companies.

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Minimum Viable Product (MVP)

The Minimum Viable Product (MVP) is the most basic commercially viable iteration of a product. Once an MVP is launched, a company can find issues with the product and correct them with a better, bug-free product.

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Private Equity

Private Equity is equity capital that is not quoted on a public exchange and refers to investments in private companies.

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Regulation D Rule 506

Regulation D Rule 506 is a “safe harbor” for the private offering exemption. Under this rule, companies can raise an unlimited amount of capital to an unlimited number of accredited investors and up to 35 other purchasers. Also, subject to certain restrictions, the company may use general solicitation or advertising to market the securities. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated –  that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment. Further, purchasers receive restricted securities, which may not be freely traded in the secondary market after the offering. Lastly, the seller must be available to answer questions by prospective purchasers. Please consult with an attorney.

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Revenue is money that is brought into a company by its business activities (typically from sales).

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Safe Harbor

A Safe Harbor is a series of actions a company can follow that guarantees the company will not be punished for those actions. Safe harbors are usually created in regard to rules that don’t have a consistent application.

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Securities and Exchange Commission (SEC)

The Securities and Exchange Commission (SEC) is the federal regulatory agency that enforces federal securities laws (such as Sarbanes-Oxley, the Securities Act of 1933, the Securities Exchange Act of 1934, and other securities regulation), proposes rules for the regulation of securities, and regulates the nation’s stock and option exchanges. The SEC works to maintain fair, orderly, and efficient markets, protect investors, and facilitate capital formation.

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Seed Capital

Seed Capital is very early-stage financing for a startup with a business venture or idea that has not yet been established. Capital is usually provided by angels and/or friends and family, though a small number of venture capitalists do provide seed capital.

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Term Sheet

A Term Sheet is a document that details the terms and conditions of the financing for an investment opportunity between an investor and a startup. It is usually non-binding. Note that in early stages of financing – Friends & Family and Seed – the company drafts the term sheet. But typically, once you get to a Series A round, the investors will draft the term sheet, or letter of intent (LOI).

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Unaccredited Investor

Unaccredited Investor means any investor that does not meet the legal requirements to be an accredited investor.

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Venture Capital Fund

Venture Capital Funds are investment funds that invest in startups and seek high returns in exchange for the risky nature of investing in startups.

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Other Podcasts in this Series
1 of 15 Preparing for Funding
Preparing for Funding Ep1: Incorporation
2 of 15 Preparing for Funding
Preparing for Funding Ep2: Founders Agreements
3 of 15 Office Hours
Preparing for Funding Ep3: Friends & Family Funding
4 of 15 Preparing for Funding
Preparing for Funding Ep4: Pitch Decks
5 of 15 Office Hours
Preparing for Funding Ep5: Initial Sophisticated Investors
6 of 15 Office Hours
Preparing for Funding Ep6: Accelerators / Incubators
7 of 15 Office Hours
Preparing for Funding Ep7: Seed Round
8 of 15 Office Hours
Preparing for Funding Overview
9 of 15 Office Hours
Preparing for Funding Ep1: Incorporation – Recut
10 of 15 Office Hours
Preparing for Funding Ep2: Founders’ Agreements – Recut