Fundraising and Investment
- Seed Funding Agreements:
- Govern the terms of seed funding from angel investors or venture capitalists.
- Equity Investment Agreements:
- Define the terms of equity investments, including preferred stock, common stock, and investor rights.
- Convertible Notes:
- Debt instruments that can be converted into equity at a future date.
It's important to clarify the distinction between "venture capital investor capital infusion" and "venture debt." They are related but distinct concepts, and therefore, the concept of a "write-off" is handled differently.
Here's a breakdown:
Venture Capital (Equity Infusion):
- What it is:
- Venture capitalists provide capital in exchange for equity (ownership) in a company.
- This is an investment, not a loan.
- "Write-off" implications:
- If the company fails, the venture capitalist's investment becomes a loss.
- This loss can have tax implications for the investor, potentially offsetting capital gains.
- For the company, there's no "debt write-off" because it wasn't debt; it was equity. The company simply ceases to have value.
- Key point:
- With equity investments, the risk of loss is inherent. There is no concept of a loan forgiveness, if the company fails the investors loose their invested capital.
Venture Debt:
- What it is:
- Venture debt is a loan provided to venture-backed companies.
- It's often used to supplement equity financing.
- It carries interest and is expected to be repaid.
- "Write-off" implications:
- If the company defaults on the venture debt, the lender may be able to recover some of the debt through asset liquidation.
- If the lender is unable to recover the full amount, they may have to write off the remaining debt as a loss.
- The compnay defaulting on venture debt, can lead to bankruptcy, and the liquidation of the companies assets.
- Key point:
- Venture debt is actual debt, and therefore follows the normal rules surrounding debt, when a company can not pay its debts.
In summary:
- Venture capital is equity, so losses are realized through the diminution or loss of the equity stake.
- Venture debt is debt, so losses are realized through defaults and subsequent write-offs.
It's crucial to understand that "qualifying" for a write-off is less about meeting specific criteria and more about the company's financial performance. If a company fails, investors and lenders will experience losses.