August 29, 2008
Growing Your Business: Desperation And Dumbness
Nothing breaks my heart more than watching entrepreneurs who are so hungry, that they make decisions — which under rational circumstances, they never would make. Those decisions frequently take those entrepreneurs right down the "bunny hole."
Recently, I was having breakfast with a gentleman who told me he was having trouble raising money. He asked if I had any suggestions. I made a series of suggestions for him, but none of those seemed to solve the immediate problem. Or, perhaps, he didn't share the problem in accurate terms.
Two weeks later, he called and told me that he had great news. He told me that he had merged his company with a public company, and now he had a public company that he could raise money against. And he felt that investors would certainly want to invest money into a public company more than they would want to invest in a traditional, private organization. I counseled him that it was probably one of the worst decisions that he could have made. Unfortunately, he didn't come to me earlier for advice prior to making the merger decision.
In desperation, he had done something which had risked the stability of his company and had created a series of unnecessary responsibilities. Another two weeks later, he called me back in a frantic state and began asking me how to unwind the transaction. It turned out that he had been tricked into a situation where all of his stock was now wrapped up in a company that was playing games. As I watched the stock price of this company, it tumbled by 80% in just 30 days.
I ended up giving the gentleman a referral to one of my friends who is a securities attorney, so that they could hopefully begin to unwind the transaction. The unfortunate part of it was that his cash was so low, that he couldn't afford to retain the attorney. I asked the attorney for a favor, and got them to work together to try and save the company from the abyss.
I see this unfortunate situation every day. In another situation, a gentleman, again, desperate for business capital, accepted an offer from an offshore firm who promised him the moon. The offshore company told this entrepreneur that they would provide them with a tremendous amount of capital in exchange for very little of his company. But the truth is, when I looked at the deal, I understood immediately that although they were taking very little of his company, there were trap doors that were set all over the arrangement. If the entrepreneur failed to meet any number in any of the projections that had been prepared, then the investing company would spring into action and take nearly all of it away.
It's not very much different than how credit card companies offer 0% or low percent, but take all those benefits away the minute that you're a day late on your payment. This situation occurs for entrepreneurs, too. The gentleman in this situation naturally missed one of his numbers early on, lost control of his company, lost his position as the CEO, and now is scratching just to stay on board.
I could only tell entrepreneurs that they need to reach out to competent assistance and not be penny wise and pound foolish. Paying a few dollars for some advisory assistance and getting help is among the most important things that you can do for the long time health of your business. If the business has great prospects, make sure that you treat it with great respect.
In April 2008, I wrote another blog entry on a related topic. See: http://is.gd/22BH
It's also common for entrepreneurs to go into the most critical meetings of their lives unarmed and unaccompanied by professionals. Entrepreneurs, when they're going into environments that are new to them, should always take a "big elephant" because companies will not tend to take advantage of people who appear to be experienced and financially secure. But entrepreneurs often go into situations where they appear desperate or they appear too needy. Human instinct takes over and the trouble begins. Take your attorney. Take somebody like me with you when you go into a critical meeting. Don't let your desperation drive you to do dumb things. It's really critical that you get yourself on the right track.
So, as you are working hard every day to build your company, or as you're building your career, refrain from allowing your desperation from clouding your judgment. If you can't arrange a few dollars to get some help from competent council or competent advisory professionals, then you need to question your ability to be in business and to run your company. Reach out. There's nothing to be embarrassed about when you have to ask for help.
About Joel G. Block
Well known in the business community, Joel Block is a best selling author, speaker, and business strategist. Frequently a principal in his transactions, Joel has raised tens of millions of equity dollars for his ventures, which have included real estate syndications and privately held businesses.
Joel’s career is highlighted by the launch of a financial publishing company which he grew nationwide and later sold to the Los Angeles Times. More recently, Joel works with scientists, engineers, technologists and others to help them optimize their entrepreneurial opportunities. Would you like to get a private phone consultation with Joel? Visit www.joelblock.com/capital for details.
Also, be sure to check out our newest project: a blog to organize the blogs that cover entrepreneurship: http://www.entrepreneur-hub.com
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Comments on Growing Your Business: Desperation And Dumbness »
Well said, Joel,
Thanks for blogging your first-hand experience, it’s always interesting and useful. With this post, you not only address an important issue, but also illustrate why it can be so deadly – the speed with which irreparable harm can be befall the unwary. Whether gathering investors as a private company or "going public", the lesson is the same: the game of business is The Big Leagues and the Law of the Jungle is perhaps more important to the entrepreneur than is the law of the particular state or nation. Beyond the financing level crudely referred to as the "three-Fs" (Friends, Family & Fools), the investor on "other side of the table" has been playing this Game for years and knows how to "invisibly" take advantage of the entrepreneur's desperation.
I hope it will be useful to your readers for me to expand a bit on the topic from my own experience, and hope that other readers might join in the discussion. I am an attorney/advisor on investments such as your friend might have entered into. The final legal papers in a securities deal can include changes to the Certificate of Incorporation, Bylaws, a "shareholders agreement" (re voting rights, transfer restrictions, "first refusals", business succession, etc), directors’ indemnity agreement, stock warrants, stock options, "stock plans" etc, etc - all of which inundate the entrepreneur in incomprehensible avalanche of lawyer-jargon. Key among the ploys in securities investments are the takeover (aka "anti-dilution" or "ratchet" clauses) provisions in that can have the result you describe.
I'd like to add that the entrepreneur must be equally vigilant in a non-"securities" deal. One such trap the entrepreneur might miss in any contractual deal is the "integration clause", which essentially says "Never mind all the charming promises I made over those long lunches, our ENTIRE deal is in this paperwork". And that will be all of the paperwork the entrepreneur didn't understand.
Another closely-related ploy of which the entrepreneur must be wary is the infamous "joint venture" come-on. The term sounds so official that it is enticing to the entrepreneur. Especially if the "other side" describes the relationship as a "strategic partnership". That just "oozes" the scent of stability and cash flow. Some joint ventures are perfectly legitimate and useful. The problem is that in neither business circles or legal circles is there any "standard" concept of what a "joint venture" is.
Sometimes a joint venture involves the creation and co-ownership of a legal entity, such as a corporation; and that means that the “other side” is probably going to insist on owning a majority of the stock and that means the former-entrepreneur losses control over the value of the assets he might have contributed as capital (or licensed to the joint venture). In other instances, "joint venture" could also describe a contractual relationship having no unique business entity or investment. Whatever the structure, the devil is in the details.
Regardless of the legal form of a joint venture, the Law of the Jungle is this… Often, the "other side" is really just seeking an opportunity to get an "inside" look at your operations, learn your business model, learn from working with your experts, and learn your "trade secrets", such as customer lists and software code. Such a "partner" will assure that the joint venture documents contain a "termination" provision that allows the partner to cancel the relationship when that partner has taken what it wants to take. And then your erstwhile venture-partner might also take key employees as well. In California, for example, even if your existing employee or consultant contracts forbid them quitting the job and then competing with you, such clauses are not legally enforceable. I’ve seen this more times than I’d like. Sometimes the entrepreneur tells me his situation too late and sometimes, thankfully, I catch the story before the trap is set.