Charles River Ventures new QuickStart program provides loans of up to $250K which convert to equity on a Series A financing. George Zachary explains in a New York Times interview “We think there are going to be a ton of companies that get started with a quarter-million to build consumer services on the Internet,” said George Zachary, a partner at Charles River, which has offices in Waltham, Mass., and Silicon Valley. “In an environment where a fewer number of deals are generating the majority of the gain, we think it is important to see as broad a selection of companies as possible.”
Angel Investors, and some VCs, have been doing this for a long time. There are several advantages to the entrepreneur and the seed stage investor;
- Valuation of the company is deferred until Series A financing. Valuation is always a problem this early in the game, and there are no good metrics or models to determine fair valuation.
- Dilution is avoided, at least for now. It is not a good idea for an entrepreneur to give up 30% to 50% of the equity for a small seed investment. Better to wait until you have a demo or prototype, a few people hired, and a well thought out business plan. Then you can go to a VC for a few million, but have a better pre-money valuation...and give up less equity.
- Time is important to small startups. It takes lots of time to raise money from angel investors, and even more time to find the right VC. A quick loan of $250K can give the startup time to get up and running, and get the other stuff in place before asking for serious money.
- Advice is worth more than money at this stage. Angels and VCs can give advice that will save you lots of time and money. They also have lots of contacts in their network that will help you when asked. These contacts would probably not engage with you without the introduction and request from the Angel or VC.
These loans carry a small interest rate and usually convert to equity when you get your first round of financing. There is usually a "discount" or "warrant" for the seed stage investor that entitles them to a 5% to 25% discount on the price of the Series A stock, or a warrant that allows them to purchase shares at the Series A price anytime in the next 4 years.
The Charles River QuickStart deal calls for a discount of 5% per month up to a maximum of 25%. For example if you took a loan from CRV and then closed your Series A financing three months later, CRV would get a 15% discount on the Series A shares.
Charles River also gets the right to provide up to 50% of the first round at the same terms and conditions as the other A round investors. This is a reasonable deal for both parties.
Angel Investors have been doing this for years, and even some VCs on a limited basis. I know that North Bridge Venture Partners has offered this kind of deal to startups in the past. The VC business is changing. It is good to see Charles River Ventures taking the lead here.
