December 10, 2008

Who Cut the Cheese

I know your wondering where this is going, don’t worry that is as crude as it gets.  What I really want to discuss is valuation, who decides and how you decide the post-investment ownership of your company.   Note, that this is a discussion of the reality with my personal opinion regarding the ideal.

In the down market or today Valuation has become of particular interest to both the entrepreneru and the investor.  The facts are these;

1. Down markets give investors stronger leverage in the valuation category because cash is king and credit is hard to come by. so expect investors to negotiate a little harder for lower valuation in order to capture a bigger piece of cheese.

2.  This necessitates a little more negotiating on your part.  Make sure you can clearly show the value of your company, look at everything that could create potential value and make a good argument for it.  Remember although you want to be a good negotiator, don’t let it be a deal killer.

3.  Don’t worry too much about equity portions, worry more about being selective with who you choose to partner with.  If you can get smart and freindly money, then it wont matter if they have 49% equity.  On the ohter hand if you get dumb and controlling money the 10% they take will be a burden you will hate to bare. So focus on partnering with the right people that have similar goals for your company, in the end you both will be happy regardless of what you give up to begin with.  One caveat here.  Smart investors don’t want controlling interest.

4.  Be smart about who you choose as legal council for the transaction.  don’t get firm that wants to control the deal, rather find someone who can give you good council and then move forward with whatever decision you make.  A lot of bad deals are written by lawyers that think there way is the only way.

In summary don’t make too big a deal about who cut the cheese, just make sure the relationship is founded in mutual goals so that when you do smell something displeasing you can work together to air things out.