OCTOber 18, 2019

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For Entrepreneurs — Questions We Ask in Due Diligence and Why!

By Eric Dobson

Over the now almost 12 year storied history of Angel Capital Group, now a part of the Sheltowee Business Network, we have found key information is indicative of a team ready to use our capital to buy revenue, make use of our network and expertise, and to become business partners. These are key characteristics we look for because we have learned these lessons the hard way.

Our Phase II application, found at https://theangelcapitalgroup.com/application/ is designed to get to key questions and to *test* the entrepreneur. Entrepreneurs who embrace the system generally do well. They are prepared with the right information (e.g. they have done their homework and understand how this works). They are more than likely coachable. Our business model is to coordinate and facilitate investing in ventures from Alabama, Florida, Georgia, Kentucky, Maryland, Mississippi, Minnesota, New York, North Carolina, Ohio, Pennsylvania, Tennessee, and West Virginia (states in which we currently have affiliated angel funds).  Current applications must be from counties in the Appalachia region.  Those in KY are:  Adair, Bath, Bell, Boyd, Breathitt, Carter, Casey, Clark, Clay, Clinton, Cumberland, Edmonson, Elliott, Estill, Fleming, Floyd, Garrard, Green, Greenup, Harlan, Hart, Jackson, Johnson, Knott, Knox, Laurel, Lawrence, Lee, Leslie, Letcher, Lewis, Lincoln, McCreary, Madison, Magoffin, Martin, Menifee, Metcalfe, Monroe, Montgomery, Morgan, Nicholas, Owsley, Perry, Pike, Powell, Pulaski, Robertson, Rockcastle, Rowan, Russell, Wayne, Whitley, and Wolfe.  If not, we will not accept your application without a lead investor with a signed term sheet.

 If you are applying through our application, you would be wise to read this fully, prepare your answers, and respond honestly. Hyperbole and “gaming the system” are easily detected in this process. That usually means the application goes in the digital, circular file.

The process we go through starts with your application for funding. The information is...   continue reading    


On Convertible Notes: The Early Bird Gets the Worm

By Carlos Hernandez Ocampo, Esq.

So, your idea turned out to be pretty awesome. You got a prototype built, and it didn’t blow up, then you sat down for coffee with one of your college professors who told you that you needed $100,000 to start a company and begin manufacturing the widgets en masse. The only question you have now is “Where am I going to get that money?”

Cue in the convertible note music. (I don’t think there is one.) Nevertheless, you googled some things, met an angel investor and now she wants to give you money using something called a convertible note. Let’s go over the basics of what it is.

A convertible note is a short-term loan, it usually states that an investor is lending a certain amount of money to fund your product/service and they decide at a later time if they want their money back with the accrued interest, or if they will rather let the debt “convert” to equity shares in the company. Hence the convertible in the name.

Why Use a Convertible Note?

The preference for convertible notes has been borne out of small startup companies needing the cash to fund a product launch, operations, etc. in a short period of time when conducting an accurate valuation has been impossible or impractical. It has also become the preference of many investors, especially angel investors, when investing in companies that are doing pre-seed or seed rounds of investing, the consensus is that by investing in a debt instrument instead of equity, there may be less risk and a higher chance of getting their money back. This last point is due to the different ways the debt features of a convertible note can be structured, such as the option to secure the note against company assets or that the note has priority over equity should the company fail and have to be liquidated.

Elements of a Convertible Note

There are several terms of art that go into convertible notes that an entrepreneur should be aware of, with four of them permeating most notes. These main four are the discount rate, valuation cap, interest rate, and maturity date.

The Discount Rate is a discount on the valuation of the company that the investor receives when compared to the next round of investors coming in for equity issuances with the next round of financing. Not every note has a discount rate, nor is one necessary. It is considered an incentive...   continue reading    


THE SHELTOWEE BUSINESS NETWORK in conjunction with the SHELTOWEE VENTURE FUND is a member driven-network that helps entrepreneurs start and build businesses.

Our Core Values are:
1. Help others
2. Always act in a kind, ethical and transparent fashion
3. Honor those who assume the risk
4. Expect a financial return from your interactions

Become a member of the network!  Go to:

Oct. 23. The Trade Navigation Series--Export 101 by the KY World Trade Center. 8:30 AM to Noon. $100 to $150. Location: Amatrol, 2400 Centennial Blvd., Jeffersonville, IN 47130. Wondering who you need to know and what you need to do to start exporting? In partnership with the World Trade Center Indianapolis. This seminar is an approved STEP Grant reimbursement. If you have not applied for the STEP (State Trade and Export Promotion), please visit the Kentucky Export Initiative website for more information.
Oct 23. Thriving or Trapped in the Family Business? Opportunities versus Handcuffs. 7:45 am- 8:30 am Networking Breakfast. 8:30 am - 10:00 am Event. University Club. 200 E Brandeis Ave., Louisville, KY, 40208. U of L Staff, Faculty or Student is Free. Non-FBC Member. $70. FBC Member. $35.
Oct 24. Xlerate Health’s Demo Day. 5 PM. Free. Play Louisville. Presenters: AssayMe, BrioCare, Cellgorithmics, CliniTrac, DSC Technologies, Hardin Scientific, KARE Mobile, NoHo Med, Prodigy BioSciences.
Oct 29. LEXINGTON SHELTOWEE BUSINESS NETWORK MEETING. 5:00 – 6:30 PM. BASE 110, 110 West Vine Street, 4th Floor, Lexington, KY 40507.
Oct. 30. Louisville LEAP & Techstars Founders Series, Building Great Corporate Partnerships. Featured: Dave Drach, VP Corporate Strategy at Techstars. 6 to 7:30 PM. Story Louisville, 900 E. Main St., Louisville. Free.
Nov. 11-15th. Techstars Louisville Startup Week. http://startupweeklouisville.org/
Nov 4. CINCINNATI SHELTOWEE BUSINESS NETWORK MEETING. 4:00 – 5:30 PM. Fueled Collective, 3825 Edwards Road, Cincinnati, OH 45244.
Nov 7. The AWARE: ACCESS program will host its Annual Commercialization and Entrepreneurship Summit at the Speed Art Museum. 9 AM to 4 PM. Free.
Nov 12. Vogt Awards Demo Day, 5 PM to 7:30 PM, Story Louisville. 900 East Main St. Free, but registration required.
Nov 21. LOUISVILLE SHELTOWEE BUSINESS NETWORK MEETING. 3:00 – 5:00 PM. iHub Coworking Space, 204 South Floyd St., Louisville, KY 40202.
Register for SBN events at www.sheltowee.com/events
Submit Partner Events at www.sheltowee.com/eventform


Five Reasons, As A Small Business, You Should Be Banking With a Locally-Owned Bank

By Alex Day

I started my first business dabbling in entrepreneurial endeavors from early childhood.  In recent years, I have also been a vocal advocate of entrepreneurs and small business.  As I have gotten older, I have become more passionate and adamant about the support of small business.  I have evolved from a purely free market philosophy to one that believes that large organizations are inherently flawed and will always evolve to promote their self-interest as an organization.  Whether it be the federal government or Wal-Mart, large organizations don't look out for the little guy and will gladly crush the little guy to accomplish their objectives.

I have reached a point now where I attempt to live by the rule of, "do unto others as you would have them do unto you".  I see now that when running a small business, you should do always do business with other small businesses.  The area that took me a while to apply this was in my banking relationships.  And this should have been one of the first areas that I adopted my "do business with small business" motto.

For several years I was with a multi-national bank.  And this, to be un-named multi-national bank, did not care much about me as a customer.  Now I had some good days with them.  I had a branch manager that was outstanding at customer service and made me feel like I had a real voice as a customer.  She was a great branch manager and was promoted.  And I started all over again, with a less than stellar individual (he might have been great, but compared to his predecessor he didn’t stand a chance).  I had my personal accounts with this bank.  I had my business accounts with this bank.  To make a long story short, I had a single catastrophic event that brought to mind that I am nothing to this multi-national conglomerate.  The treatment I received was horrendous.  And I looked back and remember how many times I would hear, "we can't do that".  Or, "that can only be done at a higher level of management".

There were so many things that were great about being with a multi-national.  Great rates.  ATMs everywhere.  All kinds of products.  But when it was bad it was REALLY BAD.  There are many things that are disappearing in life for small business.  Small banks are one of the things are still around, but they have a hard row to hoe.  They usually don't offer the best rates.  They usually don't have all the services and bells and whistles that the multi-nationals do.  But below are the five reasons I think you should absolutely work with a locally owned bank.

  1. You can actually build relationships.  With a locally owned bank, you may even get the opportunity to meet the President and CEO of the bank.  But as your business grows you will become a known entity.  You won't simply be a number on a piece of paper.  The people at the bank will know who you are and although (with the hyper-regulated environment of banking) they don't have complete flexibility, they will demonstrate more than a multi-national will. 
  2. You mean much more as a customer to a small bank than you do to a big bank. Let's assume you do nothing more than open a business checking account and a personal account with the bank.  Let's look at their annual revenues and ...   continue reading    

Highlights of Startup Louisville Week

The Founder Hunt, Nov. 15—11 AM to 5:30 PM, Churchill Downs, Starting Gate Suites. Registration Required. www.thefounderhunt.com

As part of Techstars 1st Startup Week in Louisville, a new event is being unveiled called The Founder Hunt at Churchill Downs from 11 AM to 3 PM, then networking and racing action.  This event is designed as a startup pitch in reverse. Research-backed technologies from universities and related facilities are seeking investors and founders who want to build a company around them. 

Attendance is expected from those who are investors, corporate innovators or founders particularly in healthcare, bio tech, or life science in the Midwest region looking for new technology to integrate into their products or services.  Founder Hunt is supported by commercialization efforts at the University of Louisville, University of Kentucky and the Commonwealth Commercialization Center (C3).  Other partners include LEAP, and the Louisville CEO Healthcare Council. 

The day opens with a Keynote Address from:  E. Joe Steier, CEO of Signature Healthcare.  He is the President & CEO and Co-Founder of Signature HealthCARE (SHC), one of the nation’s leading long-term care, rehabilitation and health care providers with 138 locations in 10 states and approximately 17,300 employees.

Technology pitches will be...   continue reading    

CAP Tables — What Are They?

By J.R. Rose

For entrepreneurs planning to take on individual or group investors, a capitalization table approach makes life much simpler for tracking and organization.  A capitalization table is a table providing an analysis of a company's percentages of ownership, equity dilution, and value of equity in each round of investment by founders, investors, and other owners.   In investor or entrepreneur circles, a CAP Table is the short version of a Capitalization (or Capital) Table.  Some people refer to capital as equity, and it is the ownership of a company by 1 or more individuals or other entities.  It shows the number of shares/units each owner owns and what percent of the company they own.  In other words, it is a record of ownership and as such must always total to 100%.

A single proprietor of a business is shown in one line on a CAP Table as owning 100% of it.  Two equal partners are shown as owning 50% each and so on.

Common things included on a CAP Table are:

  • Name of owner
  • Number of shares/units owned
  • Percent of ownership
  • Purchase price per share/unit and in total (if applicable – there is typically not a purchase price associated with founder shares)
  • Class of ownership (common shares, preferred shares, other classes of shares)
  • Round they were obtained in (typically subtotaled by round)
  • Participating or nonparticipating shares

“Non-ownership” items generally included in a cap table in order to allow full transparency as to the ownership or potential ownership:

  • Options & warrants
  • Convertible Notes & SAFEs
  • Any other quasi-ownership instruments
  • May contain calculations showing fully diluted ownership percentages in addition to current
  • Any “pools” of shares/units held in escrow for employees, future executive hires, etc.

Probably the most important and misunderstood items listed above are “class” of ownership, “participating vs. nonparticipating”, and the term “fully-diluted” ownership.  We’ll go through...   continue reading