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Buckle up for new valuations and term sheets

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• WSJ report on term sheets, valuations
• Paladin and Associates
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Editor’s note: Bill Warner writes “The Angel Connection” which is a regular feature in WRAL Local Tech Wire. LTW asked consultant Bill Warner to share advice for entrepreneurs seeking angel investors and/or venture capital investment. He is chairman of the Triangle Accredited Capital Forum, an angel investor network with over 100 members throughout the Southeast.

RESEARCH TRIANGLE PARK, N.C. - The market downturn has certainly put the damper on the view of risk by angels as well as VC's. I keep reading that there is plenty of money out there, which is true, but the problem is that there is actually less money than last year. The personal wealth of angels and the portfolio value of foundations and institutions are considerably less by 30 to 40 percent. This puts a lot of pressure on their willingness to take on new investments.

Term sheet shock

As entrepreneurs go out with their investor stories, the lucky ones get to see term sheets that are unbelievable. See Ty McMahan's article in the Wall Street Journal. The rest have to keep looking. The term sheets bring a new dose of current reality:

• Valuations that are up to 50 percent lower than this time last year; start-ups could pretty much negotiate a 2 to 3 million dollar valuation last year, but now, you can expect to see 1.5 to 2 million, sometimes less

• Dominant board positions for investors

• Significant control of money spent through strict covenants

• Tamping down of executive salaries

• Option pools carved out of founder's shares

• No recovery of past founder expenses or deferred salaries

Entrepreneurs need to show maturity

It has always been the case that entrepreneurs have to show that they have a mature understanding of the equity market. Entrepreneurs that have unrealistic expectations and are not willing to negotiate and compromise will fail to get any money. However, today's equity situation is a shocker for even the most mature of entrepreneurs. We are in a deep buyer's market and prices and terms are very much in favor of the investor. If you need the money, this is the way it's going to be for quite awhile.

Before you approach investors, get an update of your understanding of the market and be prepared to deal with this new reality.

About the author: Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the chairman of the
Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.

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