Take Care of Investors, Before They Invest

When I lecture on negotiating principles, my recommended “ground rules” always include two points (among others):

• Make sure you know what the other side really wants out of the deal, and find a way to make sure they get it.
• A bad deal for either side is . . . well . . . a bad deal.

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When I represent a company seeking to raise investor capital, I advise the company to propose investment terms we know in advance will be attractive to the investors and meet their anticipated needs.  To do otherwise is a recipe for a slow or unsuccessful funding effort.

I am frequently on the investor side of transactions, reviewing and negotiating term sheets or transaction documents proposed by the company and its legal counsel.  I am amazed by how often they miss the mark on these simple principles.  Here are examples of some errors I see sometimes see in terms proposed by companies seeking investor capital:

• Pre-money valuation is way too high, unsupported by any clear rationale.
• Exit transaction is not mentioned or is too speculative to be realistic.
• Too much control retained by founding owner, significantly disproportionate to ownership percentage.
• Refusing to provide the investor frequent access to basic business and corporate information, including inspection rights.
• Lack of accountability for performance promised in the pitch, such as milestone deliverables or other deadlines.
• Not providing contact information for investors to communicate directly with each other on company matters, including negotiating deal terms.
• Structuring different classes of investors whose interests are in conflict rather than synergistic, particularly where earlier investors are disproportionately disadvantaged.
• Retaining rights for future events that would not protect the earlier investors’ rights.

The key question the company should ask, before proposing terms to a prospective investor, is “do we understand what the investor is seeking by investing in our company.”  If the investor cannot get that, then the investor simply will not write the check the company needs.