People told you that raising money for your new enterprise would be arduous. They told you not to leave your cozy job and risk everything to go out on your own. You are laughing at them - it has been so easy. You have investors chasing you. In fact, one of them is already conducting due diligence and you know it is only a matter of days or weeks until the process is over and you get your money. You don't understand why you waited so long to start your own company, and why anyone would want to work for someone else instead of being an entrepreneur. Then, in the middle of the night, your phone rings.
Today's Enable deals with crunch time - the time period in the investment process where you must put up or shut up. Attorney Yitzhak Rosenbaum, manager of the hi-tech department at Zysman, Aharoni, Gayer, provides us with seven more capital raising lessons. The key lesson, however, is that during crunch time, you must rise to the occasion and do whatever it takes to close the deal.
Your Worst Nightmare
The call came in the night. It was the partner of one of the investors. They have been doing due diligence on your company and he said he just read on the Net that some company came out with a similar product to the one you have been working on for the last six months. You freeze. He asks your reaction. You ask him for the address of the site on the Net. You tell him let's meet tomorrow. You close the telephone. You feel like it is all over.
It's All Up To You
Lesson number nine, go for it; only you can save your company. You stayed up the whole night. Read the site on the Net. You realized there was something technically different. You call up your friend in the States, you call your mentor, anyone who knows about the project on the Net. You are ready for the meeting. You will tell him it is not the same technology. However, will your investor agree?
The meeting comes in the morning. "Listen, you are never going to be satisfied unless we go there and check it out in person, in the States, now. I called them up. They will tell you I am addressing a different issue. Are you willing to pay the expense to go together and check it out? Ask them yourselves." The partner already convinced his investment committee it was a good idea. The partner is out on a limb. He knows if you are right, then you really have something here. If you are wrong and he invests, he will look like an idiot to everyone. "Okay, let's do it," he says.
Ten days later, you are sitting in the conference room of the investors' lawyers. You know they are now convinced on the technology, but you keep looking at a pile of documents placed in the middle of the conference table and wondering what ever happened to that two page confidentiality/non compete agreement and that six page term sheet which was the basis of your deal with your investors. The investors' lawyer has already explained to you once that those documents are the first draft of the share purchase agreement, the shareholders agreement, the investors rights agreement and the amended articles of association of the your company. All you keep hearing every time you request a change to some point is "No, we do not agree." Moreover, you keep asking yourself why you are sitting here going through over 150 pages of documents.
Know Your Place
The fact is, you should not even be in the room. Lesson number ten is never face your investors on the first draft. If your lawyer and consultants are doing their job, there are probably fifty points that need to be changed on important issues, such as how much control you will have over your company, how much liability you are exposing yourself to, technology and employee issues, and how they are tying your hands, limiting your ability to cash in on your hard fought efforts, now and in the future. After all, business is business, the investors are putting a lot of risk money into you and your company, and they want to make sure they have control.
Imagine yourself sitting there, unhappy, starting to fight with your potential investors. After an hour, the deal is dead, before it started. You are in the wrong place at the wrong time.
Make Sure You Understand Everything
Lesson number eleven: when you receive the 150 pages of draft documents, you read them through, your lawyer reads them through, and then you meet, alone with your lawyer and go over every issue. Take a piece of paper, take every heading and subheading, and write down the essential issue covered in that particular heading and subheading. Then, sit with your lawyer and explain aloud in your own words how you understand the issues. Why? Because you really want to understand, and not listen passively to some boring, dry explanations your lawyer will give you. He will correct any misunderstandings, and slowly, you will realize what is important and not important, where you can compromise and where the issue is a deal killer for you.
After this meeting, your lawyer will sum up your position, pass it on to the lawyers of the investors, and wait for their reaction. Usually, the other side accepts many of the points you will request from them. Why? Because, they were trying to take advantage and you caught them. Of course, the investors will blame it on their lawyers being over protective, but this is the game.
Learn How To Accept Success
The second draft has come. You have already accepted the point that the investors will have preferred shares, you will have ordinary shares, the investors can veto various actions you want to take and you feel like the control is starting to slip away.
Lesson number twelve, learn how to accept success. This is what you wanted. You wanted a partner with money and connections. Learn to share control. It will make you wealthy in the end.
Lesson number thirteen: draft three is on the table in the conference room and the close is at hand. You talked to your investors last night before the meeting. Only a few issues are open, and the sides agree to compromise. You feel the professionalism of the investors taking over. They are pushing their lawyers to wrap it up quickly, make the closing as soon as possible, and ask you for your bank account number. The signing will be tomorrow, separately, on signature pages, and the deal looks like it is done.
It Is Never Really Over
Lesson number fourteen: this is only the first round. There is more to come. Your investors like to share the risk, to syndicate the investment money you will need over time. Remember that clause that allows your investors to bring in another investor for that other million dollars, at such and such valuation and dilute you further. No, then look for it, now that you have read these articles.
Next week we continue with our roadmap for start-ups series. My special thanks to Attorney Yitzhak Rosenbaum for his three part contribution to Enable.
Published by Israel's Business Arena on December 7, 1999