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A project financing can be structured with one or more types of debt securities as debt to equity with the right features (such as convertible bonds or bonds with warrants) into ordinary shares. Any type of security offers advantages and disadvantages for both the entrepreneur and the investor. The characteristics of your current situation and market forces affect the type and composition of the security package that suits you best.

Although each of these securities has unique properties, they can into two categories: debt or equity to be allocated. In structuring a venture capital financing, is the main question is whether the funding should be in the form of debt or equity to be.

From the perspective of a society, there are two possible disadvantages of debt financing.

Company capitalist point of view, there are three main advantages of this debt.

Although the difference can be considerable, depending upon the circumstances of the company, a position request to a lower risk in equity for venture capitalists. Consequently, a company should not have much responsibility, if the funding lost in the form of debt. However, this advantage must be weighed against the disadvantages of debt.

Whatever the venture capital financing is structured, it is making it attractive for the investor will be charged separately. There is no clear answer as to how much is owned by a company to provide attractive financing. Roughly speaking, the higher the possible return of the investor is charged, unless it is asked to personal responsibility. In other words, if a company has a patented product, a venture capitalist thinking is revolutionary and highly marketable, it will probably be less than the liability it could sell in the case of four firms with a relatively less attractive. Thus, his last position in the evaluation of a company’s potential return will be based.

Before entering into negotiations with the investor, you must determine what your business is worth and how your company want to sell. The following procedure can be used to get a rough idea of how you have the responsibility to drop the financing attractive.

Suppose that XYZ Company, Inc., a start-up should be $ 500,000. The range of the company seems to have excellent potential. However, would, because the product is new and unproven, an investment in the company to be extremely risky. It is therefore reasonable to assume that the venture capitalist wants a possible return at least ten times its total investment in five years. Management believes that the company should be able to make public “at 20 times earnings in five years. And profits after tax for the fifth year is $ 1,250,000. Other long-term funding of $ 500,000 will be needed at the beginning the third year.

The following calculations assume that the venture capital, initial funding ($ 500,000) also provides additional funds ($ 500,000) offer and he wants a return equal to ten times every second. However, it is noted that if the company is making satisfactory progress in the first two years, it is reasonable to assume that venture capital with low returns on the additional funding as it would require less likely to be satisfied.

In this series of calculations, we assume that the second investor, the more money ($ 500,000) provides. Calculations show that venture capital and initial funding ($ 500,000) would have ownership of 20% of the fifth year after the return, he wants to reach is available. However, because of the possession will be given to further funding to reduce its property, it is more than 20% owned at first. For example, assuming that 15% of shares must be given to continued funding, the venture capitalist who helped to finance the initial ownership of 23% must first put an end to a 20% fifth year offer.

Take the same facts that I deal with, except a second investor sees the continuation of funding for 15% of the shares.

It seems that the investment ($ 500,000) could be attractive to a venture capital investor interest if the principles of XYZ Company, Inc. are ready to approximately 23% of the shares.

It should be noted that the above procedure is very subjective. And you should remember that what really matters is how the venture capital given the relative attractiveness of a company. Generally, investors are comfortable with a minority stake. Even if a venture capitalist may require that the majority of the capital, generally, they are not interested in operational control. Some of them, as to the quantity of goods they will bind to the end of the performance of the company. For example, a venture capitalist who wants a majority stake in the first client the opportunity to earn some of that back. Such an arrangement can be used for a compromise on price, if there are significant differences between the client and the venture capitalist.

familiar with the venture capital business, it may seem that the VC is looking for an exceptionally high return on its investment. It is however important to understand that even under the best conditions, only a minority of companies where venture capital is to invest successfully. He understands this well, and must have a sufficient return on its investments successfully achieve an acceptable overall performance.

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