Charles River Ventures – New Investment Strategy November 3, 2006Posted by rajAT in entrepreneur, startup, vc, venture capital.
Charles River Ventures, an early stage venture capital firm, has launched a new investment strategy, offering rapid but tiny $250,000 checks to Internet start-ups.
The advantage of a seed round is that it done as a “convertible” loan, which means the $250,000 is essentially a no-strings-attached loan to an entrepreneur. There is no equity stake claim by the investor at the time, which is good for the entrepreneur, who can see how good his idea is first. If the idea gains traction, he can raise money in the series A and negotiate a high valuation for his company. If he can command a $5 million valuation, for example, the investor’s $250,000 seed money converts into only 5 percent of the company.
There is almost no liability for the entrepreneurs, because the loan is made to a corporation formed around the entrepreneur. If the company fails, the company goes away, and the founders aren’t liable.
From CRV’s site for an example:
If CRV loans your company $100,000 with a six percent interest rate, and six months later the company closed a Series A round, at that point the loan balance (with interest) would convert at a 25% discount (value = loan dollar amount plus interest / .75) into $137,333.33 worth of Series A stock. Given that seed funding amounts are typically very small compared to the amounts one might expect to raise in a Series A round, as the example illustrates, the aggregate discount amount, in this case $37K, is a tiny fraction of what is likely to be a multimillion dollar Series A financing.
Its good to see that VCs are trying to change their ways of working also. After all we entrepreneurs are their customers and they should keep us happy.