More than 80 entrepreneurs from all over the Capital Region filled the Junior Ballroom at the Rancho Cordova Marriott April 22 to brainstorm strategies for attracting investors while retaining equity. Techcoire hosted Larry Albukerk, managing director of EB Exchange Funds, shared tips for helping entrepreneurs get the most our of their business.
“It’s tough starting a company; it involves a lot a grief and heartache,” Albukerk commiserated with the group. Then he shared some hard-won lessons to enhance the upside when exiting a business deal. “Ideas are cheap,” Albukerk said. “Owners have to earn equity with sweat.” Smart negotiating helps, too.
Albukerk explained that founder’s stock works the same as common stock in an acquisition. That means they get paid after the owners of preferred stock, usually venture capital investors.
The good news was that most terms are negotiable. The founder’s power depends on supply and demand. If a lot of investors want in on a business, the owner can dictate the terms. But if the company is desperate for funding, the founder may have to bargain away a good chunk of ownership, leaving him – or her – empty-handed when everyone else liquidates.
Regardless of bargaining power, Albukerk had some tips for getting the best deal possible:
- Understand the incentive of both the venture fund and the venture partner by doing some research. Find out if this is the first or last company in the fund. That will determine how anxious the VC will be to orchestrate an exit.
- Beware compounding dividends.
- Watch your vesting schedule closely.
- Redemption can kill if in a later round, a VC decides to shut down the company by getting its money out.
- Fully participating convertible preferred stock for the VC is the worst case for the founder.
- Watch your dilution rate because if the number of shares owned stays the same, but the number of shares increases, your percentage could shrink drastically.
- Avoid raising unnecessary funds.
- Pick your co-founders carefully, they can dilute your payout more than any other factor so make sure they add value.
Most importantly, read the contract. In fact, working with a group of entrepreneurs (like Techcoire) or hiring your own attorney (remember the attorney hired by the company really works for the VC) could be a wise investment, Albukerk counseled.
Mary Thomson, president of Carmichael-based Kineto Power Generation was eager to hear his advice. “I have started two companies and all I have to show for my stock is a piece of paper,” she said.
Michael Hart, president and CEO of Sierra Energy thought the candid explanations of the motivations of venture capitalists and founders was helpful for an audience that didn’t have as much access to venture culture as those in the Bay Area.
“The statistics were very telling,” Hart said. “VCs want home runs, but they – and their investors – would be better served looking for consistent base hits.”
Hart came to the workshop considering a plan to issue founder’s stock to some key executives in his company, but is now considering other alternatives.
For photos from the event and announcements of future Techoire events, check out their website.
Comments are closed.