The 7 fundamentals of early stage investing – “Harvesting”

Harvesting is what investors call the process of getting back their investment and then some!  Harvest what you sow, right?  You will want to do everything you can to make the end perfect for everyone.  You should do everything you can to help the investors achieve a positive harvest – one in which they will make a profit.  This is how investors measure success of their investment.

Positive Harvesting comes in five (5) basic forms:

  1. Walking Harvest: Your business delivers cash directly to its investors on a regular basis.
  2. Partial Sale: Your investors sell their stakes to your company’s management, another shareholder, or an outsider.
  3. Strategic Sale: A competitor acquires your company for strategic reasons and your investors receive their negotiated share of the acquisition price.
  4. Financial Sale: A buyer outside your industry acquires your company for its cash flow and your investors receive their negotiated share of the acquisition price.
  5. Initial Public Offering (IPO): Your company sells stock in the public markets, creating a market for your investor’s shares.

Negative Harvesting is the phrase investors use for what we call bankruptcy.  Whether it’s a Chapter 11 or Chapter 7 filing, bankruptcy is not pretty!

  1. Chapter 11 Bankruptcy: If your company files this way, your investors will have a shot at regaining at least some of their original investment.
  2. Chapter 7 Bankruptcy: If your company files this way, your investors will typically get little or nothing.

So, in the beginning make sure you talk about the ending.  How can you cash out and have a win-win situation for everyone?   During the negotiation stage, you need to figure out what will happen in two – three years if you want to sell your company.  Your commitment to cashing out your investors must continue after you’ve gotten their checks.  You can give them examples such as: “your salary will remain fixed until the company is sold.” – Just make sure you have a plan and they know what will happen during the exit / harvesting stage.

How will you harvest your company?

David Amis-Howard Stevenson (2001). Winning angels: the seven fundamentals of early-stage investing. Pearson Education.

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