The views expressed by the business participants are their own.
“All of this looks like a good deal for a VC.”
That’s what the lawyer told me when he was flipping through the pages of a huge document. The long list of names sounded strange to me, but he was right. The convention and its jargon were familiar, and still are.
Unfortunately, signing that “standard” agreement is how I lost my company, and how you – or any talented, successful entrepreneur – can face the same fate.
From my kitchen table, I built a disruptive model for a $20 billion industry. I had the courage and the guts to believe I could pull it off. When the advisors saw that I was generating $10 million in the third year, they laughed and said I was crazy. In the third year, we made $22 million.
I built the model, evangelized the supply chain, motivated the team and designed the technology, all while securing and maintaining multi-million dollar, multi-year exclusive contracts with major brands such as AT&T, American Airlines, Citi, Chase and State Farm. I led the company to No. 8 on the Inc. list. 500 fastest growing companies and No. 1 on Crain’s Fast 50.
I was living the dream – until it turned into a nightmare when I raised the wrong amount of money.
VCs used every trick in the book to stop me from bringing in new capital. They sold the company in the dark at night without my knowledge. When they finally told me it was sold, they said I had three days to accept it and asked me not to give them trouble. I didn’t agree, and I gave them a hard time. I went out and got an offer from a better PE firm for $3 million more than their deal; they still refused to sell it to me. I tried to fight them, but they were backed by billionaires who told my lawyers that “they would love nothing more than to fight that woman.”
I was frustrated. So I decided to create a better system for funding entrepreneurs and share my lessons with as many founders as possible.
Here are three tricks I wish I had known before I lost my business.
Related: We Can’t Rely on Venture Capital Funding to Build a Fair and Prosperous Entrepreneurial Economy. Here’s What You Should Do Instead.
Be creative
Consider all other monetization options before signing on to PE.
- Earn money. Find a profitable business that you can acquire, then contact an SBA lender for a 7(a) loan.
- Equity is your most valuable asset: the most expensive debt is still cheaper than equity. Before you give up a single share of equity, sign a personal loan, put down a house or car, or borrow cash from anyone who will give it to you.
- Consider CVC. Business venture capital has proprietary technology, large infrastructure and contracts in-house or within their supply chains.
Be a detective
There is no such thing as a bad VC – so take the time to choose your investor.
- Before you take a single dollar, take the time to know everything about who you are getting into the proverbial “bed” with. Ask for a list of all the companies they’ve funded, check them against the public record, and then pick up the phone and talk to the founders of the portfolio companies. Research those that are not featured on their website and talk to those founders.
- Find out where the money comes from. The people you are talking to may have been financiers who were hired to manage this fund. Meet guys with money. Break bread with them. Find out what kind of people they are. Make sure you want them in your business. Get the names of all GPs and LPs and do your due diligence on them. For as little as $99, there are many services and sites where you can use Bad Player Checks.
- Does the fund have a criminal record? Search the Case Law Database to see if they are named in the lawsuit. I learned too late that one of the billionaires in the fund that sold my company under me was suing the Obama Administration. He wanted to prevent his female employees from having access to birth control through the Affordable Care Act because of his religious beliefs. He should never have been at my table because our values are not compatible.
Related: 3 Reasons Lack of Funding Can Be Your Secret Startup Weapon
Be your own ‘advocate’
A security agreement is not something you can delegate. It is your responsibility to be your own advocate, take it seriously.
- Go through all the contracts, line by line, word for word. Read the terms. Make sure you understand everything. Know the definition and meaning of every word in that agreement. Termination preferences, blocking rights, usage rights, entry rights, draw, pari passu, preferred participation – they are all loaded guns.
- Get second opinions to make sure your attorney is right. Include free local resources for entrepreneurs. There are 3,652 on helpforfounders.com.
- Be aware that you are unlikely to be able to defend yourself against VCs in court. There are no examples of founders successfully defending themselves. Most founders who need business capital don’t have the cash to pay off a lawsuit, especially one that’s against people who don’t have it.
- Say no. The right partner will want you to be comfortable. If they don’t, then walk away. Better to lose a VC than lose your business. Trust me.
There were many things I did not know before signing on the dotted line. The mistakes I made allowed me to take advantage. It took a toll on me to see that the business building industry is broken, crowding out entrepreneurs and favoring the rich, white and male, while ignoring the majority of innovators and innovators. I hope that with these courses and resources, entrepreneurs who read this will have a leg up on bad VCs.
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