Fundraising: How to Focus on Deal Terms that Matter.
Part 2 of the Founders Fundraising Toolkit.
Re-reading Part 1 of this series - I do see why the language comes across as not very approachable. As I continue writing on this, I will work harder on keeping things simple.
I will assume that you have read Part 1 and jump right in - this series must be read in the order of writing.
Basic objectives.
Lets go back to the only things that matter or should matter, to founders in a fundraising negotiation:
Equity.
Control.
Both feed into each other. You lose both over time. You try to hold on to as much as possible as long as possible.
That’s it!
Now that we know what matters, we also have to live with the reality that the life of any founder and company will involve having to sell your (and the company’s) stock. This means relinquishing either or both of these in small and big measure.
The cheat code.
So what is the cheat code to apply when you are reading any term sheet, investment agreement, shareholder agreement, share subscription agreement or any other fundraising document?
Interrogate every clause, provision, sentence and paragraph on the basis of how it affects (a) your equity and (b) you ability to control. Examples:
Equity: What does this mean for the shares I hold? What does it mean for the value I can get from them? Will it affect their value? Can they be taken away from me?
Control: Can I be fired? What happens when I get fired? How much control do I have over the Company? Is the board in my pocket? How much of the board can I control? Who can fire me? Does this mean I can get fired? Does this mean I lose Board seats? Does this mean X or Y can happen even if I disagree? Am I boss man in the company? Who is the boss man?
Equity is protected by fear and greed, and control, by the desire for power and security. Channel these. You cannot have one without the other. Equity and control are two sides of the same coin.
Counter-arguments
The counter from your investors and everything in the legalese presented before you, will be:
With power, comes responsibility. With ownership, comes accountability. We are risking our money on you. Its the jockey, not the horse!
These themes will come up in every conversation with your investors and every negotiation on deal terms. You will even find yourself sympathise.
Surely, who can argue with checks and balances on my power?
That is a fair situation for me to get fired?
Oh, I would never do that! I would never be in that situation.
Surely, he will have my best interest at heart in that situation.
If I did THAT, ofcourse you can take all my equity free and I will walk away from everything.
Ofcourse! I am not out to defraud you, ofcourse not! If I did that, I would walk away with my honour intact. The company is yours!
Oh, if my company isn’t going to be a unicorn in 5 years, I might as well just walk away, who cares? They can have it all.
Hey, this seems very hypothetical to me and I don’t think its worth fighting over. The possibility is just too remote.
You are getting distracted.
Don’t.
Train your mind to focus properly on analysing equity and control.
With the introductory posts out of the way, Part 3 in this series will focus on the first deal term you need to learn.
We are going to go from most to least important, and numero uno on the list will be covered next in the Founders Toolkit:
Founder clawbacks.
Things should get interesting from here.
[This is part of a multi-series essay called the Founders Fundraising Toolkit. Its free for my readers and for a limited time. Invite your friends to read and subscribe if you enjoy this or find it useful. Your feedback has been valuable to the topics I write about. If you have a blog that covers topics like this one, write to me!]