Startup Investing for Student Entrepreneurs

Startup Investing for Student Entrepreneurs

I have been fortunate to work with student-led startups recently. A common theme in their questions is how to raise money and the structures that these startups should consider.

The outside investment process is specifically, no founder, no friends and family money. People who do not have an emotional interest in you as a person prior to investment. This is crossing the bridge from a student run project to a real company.

As an angel investor, I looking for companies that can ramp to $10M in revenue. Get there then consider an exit strategy. For the first look at a startup I consider:

1. Delaware C Corp
2. Team
3. Market and Potential Impact

Delaware C Corporation

First (and most important), most venture capital firms will only invest in Delaware C corporations. Second, most angels to seed investors looking for Qualified Small Business Stock (QSBS) tax exemtion opportunities. Third, the structure shows that you are serious so that potential investment will not go to restructuring the company appropriately for future rounds.

There are many benefits to forming a Delaware C Corp, but for this post it is important to know that it is the entity of choice for venture capital and angel investors.

Team

For student run companies, finding people who will dedicate themselves to the company is critical. Many view startups as a project and when school is done, it is over. Team is critical for any startup; however, for young entrepreneurs it is even more so.

Market and Potential Impact

Who are your customers and how many of them are there? Student startups have a great advantage with the “.edu” email address. Use that as much as possible. Many people are willing to help students so use this advantage to find market data and learn where you can compete and win.

If I am satisfied with these criteria, then I will move to the due diligence on the company and the type of investment.

There are two common structures to raise funds: Convertible note, and the SAFE (Simple Agreement for Future Equity). Convertible notes are debt financing in which investors lend money in exchange for the right to convert the debt into the company’s stock at a later date. Convertible note can be completed quickly and provides investors with bankruptcy protection. The SAFE is becoming more popular outside of Silicon Valley and the benefits to the entrepreneur should be considered. Created and published as a standard simple replacement for convertible notes, the SAFE was authored by Y Combinator in 2013 and open sourced. In practice a SAFE enables a startup company and an investor to accomplish the same general goal as a convertible note, though a SAFE is not a debt instrument.

Outside investment is a milestone event for a startup. There are many ways to structure this inflow of capital. Convertible Note and the SAFE are the two most common in my areas of interest and all startups should be familiar with the pros and cons of each before they begin pitching.