For the last seven weeks, we have been discussing “Winning Angels: The 7 Fundamentals of Early Stage of Investing.” Each fundamental provided great takeaways for a novice investor like me. In the final chapter, Amis and Stevenson discuss seven harvesting methods to exit an investment deal, five being positive and two negatives. Harvesting is essentially reaping from which you’ve sown into an investment deal.
A brief recap of the six fundamentals:
- Sourcing – refers to educating oneself in their area of expertise, gleaning sound investment advice from others, creating relationships with experienced investors, and choosing an area that you can utilize your knowledge and invest.
- Evaluating – assessing people, business opportunity, context, and deal.
- Valuation – choosing from one of the five approaches to value a company and determining its current worth.
- Structuring – three common ways in which Angels claim their stake after investing into a new company; common stock, preferred convertible, or convertible notes with terms.
- Negotiating – this stage is optional, and investors have the opportunity to allow a proxy to negotiate their interests on their behalf.
- Supporting – investors can choose what type of role they will fill during their investment deal. Roles also have the ability to evolve and change.
According to Investopedia.com, “A harvest strategy is used regarding equity investments, where it refers to a proposed plan for investors, [i.e. Angels], to reap the profit from their investment.” (Investopedia.com, 2017). Moreover, the ultimate goal for an investor is to reap more than they have sown.
Five positive methods to harvest an investment are walking harvest, partial sale, initial public offering (IPO), financial sale, and strategic sale. Two negative methods are Chapter 11 and Chapter 7 bankruptcy filings.
Positive harvesting methods benefits and drawbacks:
- Walking harvest – investors draw cash earnings without absolving investment relationship. Depending on the supportive role the investor may still be heavily involved in the company.
- Partial sale – investors sell a portion of their stake in the company and may take a loss on initial investment.
- IPO – initially have a better upside for the entrepreneur but can ultimately be lucrative for the investor when shares are sold. The downside is that the market determines the price of shares.
- Financial sale – a cash sale in which the investor will earn what was invested and possibly more. The drawback is management is at risk.
- Strategic sale – One of the most popular methods in which an industry rival seeking to get a competitive advantage buys more than the actual value. A disadvantage would be the competitor may make more money off or purchase.
Negative harvesting benefits and drawbacks:
- Chapter 11 – saves the company from complete liquidation and has a chance to make an upturn, but sours the morale amongst investors.
- Chapter 7 – there is no benefit to this method, and all assets are liquidated to pay off debts.
Harvest Strategy. (N.d.). Retrieved June 26, 2017, from http://www.investopedia.com/terms/h/harvest-strategy.asp
Amis, D. & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage of Investing. London: Financial Times Prentice Hall pgs. 289, 293, 294,