Are You “Deal-Ready”? Come to our October 18 class if you have any doubts. What kind of doubts? Consider this story:
You have done pretty well at slogging through setting up your business over the past five years. You have a product. You have customers. You have an excellent pitch document. You are hoping you can elevate your game by getting in some more investment. Aha! You have a nibble. They look serious. You sign an NDA. They send you an outline of the information they want to proceed to a term sheet. The outline is six pages long–single spaced. Holy Guacamole! Are you ready with answers? Or is this a crisis? Are they asking for things you know you should have, but have postponed getting together? You know they want info back in a week. That’s not enough time. What in the world do you do?
To avoid panic, long before you reach this point, you need to think through what you need to be “deal-ready”. Most of the items are obvious, but getting them done is rarely on the top of the list of priorities. But knowing what all needs to be done well in advance gives you time to prepare. Here are a few examples of the kinds of information that show you are not “deal-ready”:
- You took in money as a “loan” from a family member and you signed a one-page note. But you said the interest rate would be set based on the conditions of an equity round greater than $1 million. Or it will convert to equity at a 30% discount to the equity round. Pretty loose. Can you get this tied down? What if the equity investor does not agree with the 30% discount, and offers only 10%? What happens?
- You have verbal employment contracts with several key employees. Do you think they will remember the deal the way you do? Did you promise them equity? Did you issue that equity or say it would be handled later? If you issued it, what valuation did you use? What if that is wildly different than what your potential investor has in mind? Did you promise them raises if new money came in?
- Have you been deferring salaries of any of your employees to stretch your runway. Is that deferral documented and signed? Does it meet the legal test of a salary deferral?
- You have been diligent in keeping a General Ledger, but never really had anyone assemble it into a system of accounts that meet current accounting standards. You have been serving as your own chief accountant. Now there are all sorts of strange entries on the Balance Sheet. Your potential investor wants to see three years of audited financial statements with explanations. What now?
- Did you tell any prior investors they would get “anti-dilution protection”? Did you define what you meant? Did you limit it in time or is it perpetual?
- Have you given anyone exclusive rights to sell your product or to sell within a certain territory or customer segment? Is that documented? Does it have an expiration date, or conditions which must be met for it to remain in effect?
If any of these sound familiar, our October 18 class would be a good one for you. You can find details here.
ABOUT THE AUTHOR
Gary Simon is the Chair of CleanStarts Board. A seasoned energy executive and entrepreneur with 45 years of experience in business, government, and non-profits.