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What exactly is a milestone?
Milestones are pre-agreed targets that are crucial to the valuation of the company from the perspective of the investor (definition borrowed from the book ‘Venture Capital Deal Terms – a guide to negotiating and structuring venture capital transactions’ by Sjoerd Mol of Benvalor and others, see: http://www.venturecapitaldealterms.com/). Looking at the ‘technique’ behind them, milestones can be split in two different types: investment milestones and valuation milestones.
With investment milestones, a certain amount of the investment is postponed until the milestones are fulfilled. If all shares to be issued to the investor are issued upon payment of the first tranche, the company is in serious trouble if the milestones are not fulfilled. Not only will the company not receive the second tranche of the investment, the valuation against which the shares were issued changes.
Valuation milestones do not affect the height of the total investment, but are used to adjust the valuation of that investment. Investments with valuation milestones are usually split in several tranches, the number of shares to be issued for each tranche then depends on the fulfillment of a milestone.
This is a very high-level breakdown of milestones, but what’s important to comprehend is what all milestones boil down to: a possible re-evaluation of the price per share or the equity interest the investor gets in the company for the amount invested.
Apart from the obvious interest investors have in milestones, they can be very useful for founders as well: it helps founders break down their master plan for the future growth and success of the company into the smaller and more practical steps necessary to achieve their goals.
Some common examples of milestones are: the release of the 2.0 version of the product in app stores, a minimum amount of sales of the product of EUR [amount] or a certain number of users of the product. All of them of course prior to a date agreed upon by the parties.
How does a milestone become a pitfall?
If the milestone can benefit both the investor and the founder, you might wonder what could possibly go wrong. Here goes.
Now we’ve come to the deadline of the vague or un-met milestone. At this point, the company needs the money, so the founder is in no position to make any demands from the investor or to go to court to settle the matter. The founder can only stand idly by while the equity interest of the investor increases.
Milestones, keep calm and …
Of course you can do your best to avoid a milestone becoming the tomb- or headstone of your company. Keep calm and:
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