An Investing Round is a Financing Event during a company raises capital (money) to support its start-up, operations or growth.

Follow on rounds are investment opportunities used by companies to provide additional capital, typically either to support needed resources to fund growth, or because they have not achieved their performance objectives from prior capital raises and require additional cash to support operations.

The most common financing round is when a company sells stock in its company, and whereby the investors in/lenders to the company receive a percentage of a company stock (equity). Traditionally, a company will sell 15-20% of its stock in each of its first two equity financing rounds.

A convertible note is a loan given to a company by a lender/investor that converts into stock (equity) in the company once a pre-defined triggering event occurs. Convertible Notes always include an interest (dividend) benefit to the lender of usually 6%-12%, payable to the investor. Instead of receiving repayment of the loan and the interest in the form of cash, the principal amount of the investor’s loan along with any interest that has accrued will convert into equity (stock) in the company when a future equity round occurs.

Convertible notes also tend to include investment incentives such as discounts on the share price of the equity (stock) being awarded at the conversion and caps on the company’s valuation at conversion, both of which can be very investor friendly. Importantly, every note has a maturity date at which point it must either convert into stock or be repaid. In some instances, a company may request that its investors approve an extension of the maturity date to allow it additional time to prepare for either outcome.

A SAFE, or a Simple Agreement for Future Equity, is a type of investment instrument typically utilized by very early-stage companies seeking to raise capital. It is an agreement whereby an investor invests into a startup with the expectation of receiving equity at some point in the future.

This differs from “equity rounds,” such as a Series A financing, in that the investor does not receive any equity at the time of investment, and there is no formal valuation assigned to the company. Instead, the investor negotiates a list of conversion terms that outline: 1). The necessary triggering event(s) for receiving equity, which is typically the raising of an equity round or a liquidity event. 2). The various incentives for investing early, such as a conversion discount once the company raises an equity round (usually 20-30%) and/or a valuation cap that protects against downstream inflation of the company’s value.

Note: SAFE Notes are not as investor friendly as other capital structures and the Gulf South does not currently invest in SAFEs because there is very little protection for the investor.

An SPV, or Special Purpose Vehicle, is a legal entity formed with the sole purpose of pooling investor capital together to invest in a company. SPVs were created to circumvent very high minimum investment requirements set by certain companies, E.G. $100,000 for an investor to be able to participate in an investment round. By creating a pooled SPV, E.G. of 10 investors each investing $10,000, the $100,000 minimum requirement will be achieved, and smaller investors will be able to participate in the investment through the SPV. SPVs are legal entities.

The Gulf South Angels creates a Limited Liability Company (LLC) for each SPV it sets up. Investors in the SPVs must sign related Subscription and Operating Agreements. After signing, GSA provides instructions to the investors on how and where to send their capital to the SPV’s bank account. Once the SPV has received each investor’s capital, it sends the aggregated capital to the company. Therefore, by investing in the SPV GSA Members become indirect investors in the company.

Every Member who invests in an SPV has ownership of the SPV on a pro-rata basis. Meaning your share of both the distributions and operating expenses will be calculated relative to your percentage ownership of the SPV. Operating expenses are calculated over the course of the next five years and include fees such as legal, accounting, and banking.

Carried interest, or “Carry” for short, is the portion of distributions resulting from a liquidity event that is paid to SPV or Fund Manager(s) as compensation for their services in managing the SPV.

The way this works is as follows:
In a liquidity event when capital or stock proceeds are awarded to the SPV, the first amount distributed by the SPV will go to the investors. Once each investor has received 100% of their initial investment in the SPV, the remaining capital or stock is divided between the Manager of the SPV (or Fund) and the Investors. In the case of the Gulf South Angels SPVs 95% of the remaining capital/stock goes to the Investors and 5% goes to the Manager. The 5% that goes to the Manager is called the Carried Interest or Carry.

Carried Interest amounts vary among different investing organization with some Managers receiving as high as a 20% Carry.

A Warrant is an incentive that certain companies make available in their financing rounds to attract investors. The Warrant is a contract that provides the holder with the right to purchase shares in the company at a fixed price, with the price generally being fixed for several years into the future.

Example:
An investor originally invests $10,000 into a company. With this the investor receives a Warrant that provides the Investor the right, but not the obligation, to purchase up to 10% of the capital he/she invested (which would be $1,000 which is 10% of $10,000 originally invested) n shares of the company….at $10 per share. This means up to 100 shares can be purchased ($1,000 divided by $10 per share = 100 shares)… and the Warrant is valid for 5 years. Fast forward 4 or 5 Years. The company has grown and the share price is now $50 per share. The Investor can exercise the Warrant at the fixed price of $10 per share, but they now are holding stock worth $50 per share. $50 per share times the 100 shares = $5,000…. or an immediate profit of $4,000 (400%).

It’s important to note that the Warrant holder is not obligated to exercise the warrant, they are simply given the right to take advantage of this is if the share prove grows during the life of the Warrant.

A K-1 is a federal tax form used to report an investor’s share of income and losses related to certain tax structures of companies or funds in which they invest. In the GSA and The Pelican Angel Fund contexts this usually relates to companies that have LLC Limited Liability Company) structures.

The two classes of stock/equity primarily sold by companies are Preferred Stock and Common Stock. Preferred stock is superior/senior to Common Stock.

Most often (but not always) angel investors require and receive Preferred Stock. The core word of Preferred is “preference”. Preferred Stock comes with a particular advantage over Common Stock. This being, a Liquidation Preferences which allow holders of Preferred stock to receive distributions from liquidity events before Common shareholders.

In rare instances, the liquidation preference may be 2x or even 3x the amount of capital invested by a Preferred Shareholder, which would allow Preferred shareholders to receive multiple times their investment before Common shareholder holders receive anything. Preferred shareholders may also receive Veto Rights that grant control/influence over key decisions in the company.

Common stock is typically held by company management/employees and comes with voting rights that may junior to voting rights of Preferred shareholders

Most Favored Nations (MFN) is language in a contract that guarantees that an investor will receive terms as favorable as those to any other investor in a given investing round. GSA often has Most Favored Language contained Convertible Note investing rounds.