How do I choose the terms of my Small OPO?

You need to decide what terms of investment you would like to offer to prospective investors. Below is the list of options you can choose from:

Common Voting Shares

This is the most common form of investment. Investors would own common shares in the company. A Corporation is composed of one or more classes of shares. The founders and employees of a company will typically own common voting shares. These shares have the right to vote during annual meetings or significant company events such as authorizing the sale of the company.

Investors value a company by taking the valuation and dividing it by the total number of outstanding shares that were issued to shareholders or employees. This will yield the price per share. When an investor purchases shares, they determine the total value of the company by multiplying the price per share by the total number of shares issued at the time of the investment.

Common Non-Voting Shares

This is similar to common voting shares with the one difference that these shares do not have the right to vote during significant company events. Companies who propose to sell non voting shares are concerned with keeping more control of the company with the insiders which represent the investors and employees who own the common voting shares. Typically experts consider common non voting shares to be less valuable than common voting shares. It is not clear as to what type of price discount a company would be willing to offer to investors for lesser valued shares. Investors will take into account the loss of the voting rights when they decide whether to invest or not in the company.

The StartEngine Subscription Agreement is electronically signed by both the company raising capital and the investors. This is sent once the company has made one or more disbursements.

Preferred Shares

Unlike common voting shares, preferred shares are special shares that convert into common only when a set of conditions forces the owner of the preferred shares to receive common shares. They are a special class of shares with their own investor rights described in the agreement signed with the company. A company issues preferred shares to investors who want protection over the common shares. If a company is sold, the preferred shares receive their capital first before the common shareholders. This is a protection in case the sale is below the amount of money invested into the company, thus giving these shareholders a preference over the other shareholders. There can be multiple levels of preferred from Series A to F, for example. Each level can have its own rights and its own preferences over the other classes. For example, a startup can raise $1.07M offering preferred shares that convert into common shares if the company is sold or goes public. They would offer the largest investor a board seat and allow the preferred shareholders to vote on the sale of the company without allowing the common shareholders to weigh in.

The StartEngine Subscription Agreement is electronically signed by both the company raising capital and the investors. This is sent once the company has made one or more disbursements.

Convertible Note

This form of investment is popular with technology startups because it allows investors to initially lend money to the company and later receive shares if new professional investors decide to invest. Some argue that owning a convertible note can be be safer than owning common shares because if the company fails to raise additional capital from an investor then the investor can ask for the loan to be repaid with interest. However, in some cases startups are not able to repay in cash and they will negotiate a fair exchange from the loan to either preferred or common shares.

A convertible note has four special features:

  • A conversion cap
  • Interest on the loan
  • A conversion deadline
  • Conversion trigger terms

Revenue Share or Royalties

You can offer a set percentage of the sales or a well defined net revenue from your business and pay it to the investors every year. For example, you can offer 20% of the revenue net of costs of goods sold not to exceed 40% every year for a $1M investment. This annuity will continue for the life of the business. You can also structure a clause that would allow your company to buy out the investors at anytime with a set payment amount. For example, at anytime the company can pay investors a $3M cash payment as a buy out and cease any further revenue share.

The benefits for investors is to bet on the growth and success of the company while getting a defined payment even if the company does not make a profit.

Debt

You can ask investors to loan money to your company for a fixed interest payment per year for a defined number of years. The end date when the loan repayment is due is called the maturity date. For example you can ask for a $1M loan with a 7% interest payment every year. Typically loans come with penalties in case the company does not pay the interest or repay the loan at the maturity date. For example, a 1% penalty for a late payment. You can also offer the right to purchase a number of shares at the then share price. This is an added incentive for people who prefer to loan money instead of investing in shares.

Perks

The traditional crowdfunding industry has been built on the idea to offer special perks for people who back crowdfunding campaigns on Kickstarter or Indiegogo. With Online Public Offerings companies can also offer, in addition to the investment terms, special perks. The more special the perks are, the more attractive the investment can become. It is a way to thank your investors or lenders for believing in your company. You can take a look at many of the StartEngine past and existing campaigns that offer perks.

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