In the spirit of the annual tradition of New Years resolutions, Ive complied a few points to reflect upon while you ponder the upcoming year
HIDING THE DILUTION
A savvy entrepreneur or prior investor might engage in a little Hiding the Dilution game playing during a financing. Now, if you READ all the legal documents, you likely will never fall prey to this trick (see Delegation Disasters below), but if you arent paying attention, dilution can bite you in the butt quite readily. Dilution can hide in the Schedule of Exceptions and in the Articles. It can also arrive in a board resolution post-financing to increase the option pool. Maybe that 3 month bridge the prior investor was so happy to take on by himself resulted in an egregious amount of warrant coverage. Dilution can crop up just about anywhere and this is one thing a decent VC gets religion on right away. Only the neophytes and Delegation Disasters tend to miss it. The rest of you know what you are doing.
Resolve to never lose sight of ownership percentage and expected terminal value of your investment.
GOING ON HOPING SYNDROME
In the past 2 decades, I have observed the Going on Hoping Syndrome plague investment professionals of venture capital firms. What is the going on hoping syndrome? Simply put, when an investment professional continues to throw good money after bad in hopes of achieving even a modicum of success (or, when Im not in a particularly charitable mood, when an investment is kept alive AND carried at – gasp – cost on the books to delay the investment professional from taking a hit to his track record)
Resolve to be bigger than your ego and do the right thing by your investors with respect to under-performing companies.
TAKING OVER PAYMENTS STRATEGY
Larger firms with top quartile returns are envied by their peers. Envied and fawned over. Everyone wants to be their friend. It is this psychological failing that fuels a nasty little game I have coined the Taking over Payments Strategy. A player has a deal that is crap. He would never syndicate this deal with his buddies, so he makes a few calls to lower tier firms and instantly gets several bites. He brokers a deal that maintains (or increases!!) his ownership while the new (sucker!) firm bridges the company through its next milestone (or next couple of months, as the case may be). If you dont have a close, long-term relationship with a player, and he comes knocking at your door, trust me, you are being courted to take over payments. You are simply an option, nothing more. Dont expect that funding a deal in this manner will set you up to do future A quality deals with the top tier firm. It wont. It will only establish you as a tried-and-true sucker, and the taking-over-payments deals will flood your in box.
Small Fry: Resolve not to be star struck by big firms wielding crappy deals in hopes of getting on their holiday party invite list.
Player: Um. Gee. If you can find a sucker to delay a fire sale of your company – possibly buy it a lottery ticket chance of success, what can I say? More power to you, as your actions benefit the company and your investors. Of course, I couldnt do your job, that is for sure. I need my sleep.
DELEGATION DISASTERS (DDs)
Ive met a lot of VCs over the years and most of them are sharp investors. Most, but not all. Some of them are what I have coined, Delegation Disasters. As a CFO, they can be particularly problematic as they appeal to my detail oriented nature. In a nutshell, they dont read legal documents and they probably couldnt interpret them if they did. They delegate. Down to strategizing all the if/then trees of a negotiation and hashing out the terms of the deal. Indeed, sometimes delegation extends to the board seat itself (but that is very rare as Delegation Disasters typically have egos far in excess of their capabilities and are very happy to sit on boards so long as they can bring along an associate or dump the board packet on their CFO to distill later.) Im always left scratching my head as to how a Delegation Disaster ever got a job as a partner in a VC firm, and, luckily they are few and far between, but they exist. And, no, doing their work for them rarely brings you personal recognition and glory. Mainly because their deals usually suck (um, see Taking over Payments Strategy as Delegation Disasters are uniquely prone to such deal flow.)
DD: You dont know who you are. Its a pity.
Partners of DDs: You know who they are. Clean house.
NOTE: Dont mistake a Delegation Disaster with his/her opposite, the Trust your Partners Partner. This type of investment professional partners with others at the firm and the firms CFO to ensure that the best deal gets done. At times appearing like a Delegation Disaster on the surface, the Trust your Partners Partner may request detailed reading of legal documentation by the CFO and others in conjunction with his own to ensure all points of view are taken into account and no stone is left unturned with respect to a financing (its also a great learning process for the youngsters). However, anothers review of the deal is *never* substituted for the Trust your Partners Partners personal (and typically highly detailed and thoughtful) review of same. S/he simply respects your input and will act accordingly. Imagine that.
Resolve to trust your partners and to be worthy of their trust.
Well, those are a start. Perhaps you have guidance of a slightly satirical nature, in return, for CFOs such as me.
I truly love a good laugh.
Happy New Year!