AngeBlog by Basil Peters

Exchangeable Shares for Angel Investors

Solves the recent challenge for angels

The term sheet innovation that we believe best solves some of the challenges angels have been having over the past five years is the Exchangeable Share.

It solves the biggest problem with the Convertible Notes - the unfair discount - while maintaining it's simplicity and cost effectiveness.

It's simple

The idea behind the Exchangeable Share is that pricing is negotiated as it always has been, on a cost per share basis. But in this case, the angels purchase common shares with an agreement that if a VC subsequently negotiates a more desirable form of shares, that the early-stage investors also receive the same type of shares.

For example: let's assume an angel invested $50,000 at $0.25 per share to purchase 200,000 exchangeable shares. The company does well and a while later, a VC buys series A preferred shares at $1.00 per share. Now the angel investor would have the right to convert his 200,000 exchangeable shares into 200,000 series A preferreds if he chooses to. The number of shares is constant - they are exchanged on a one for one basis - but the angel also has the right to have the superior terms attached to the preferred shares if he elects to exchange his shares.

Included in the subscription agreement

This mechanism can be included as a contractual commitment in the subscription agreement. The angel's shares can simply be exchanged on a one for one basis with the preferred or other form of equity subsequently negotiated. This preserves the initial pricing agreed to, but provides the earlier investors with the same terms and conditions. The One Page Term Sheet shows how easily this can be accomplished.

It's fundamentally fair

This is fair to the angels, who took the larger risk. We also believe its fair to the later investors and to the company.

Next round investors

Of course, everything is negotiable by the next round investors. We hope they will all graciously agree this is fundamental fair and reasonable considering the indispensable contribution made by the early angel investors in providing the previous, riskier rounds of financing.