When taking in a capital partner, people tend to focus most on the amount of money the partner is investing into the company and the valuation. While these are both important things to consider, there are many other things a company should ask potential capital partners.
How involved do you like to be in your portfolio companies?
A capital partner’s involvement in a company can vary dramatically. Venture and private equity firms tend to be highly governance-focused, which means that they impose substantial limitations on management autonomy and have substantial additional consent and other rights. Some capital partners want to know every detail of a company’s business with updates multiple times a week, while others want an update once a quarter.
Our experience has been that family offices generally tend be less focused upon governance and want to be kept current on company progress, but prefer not to assume operational or board roles within their investments.
Generally, we prefer to match companies with capital partners that do not desire to be actively involved in the company’s operations. When we work with a company, we do so because we believe that the company’s management team has the ability to lead the company to success. Partners should be able to provide advice when requested, but should not interfere with a company’s ability to execute.
What is your history of conversion vs repayment?
Many capital partners prefer to structure growth capital transactions as convertible notes, rather than straight equity. A convertible note is debt with the option on the part of the investor to convert the debt into equity.
Investors look at convertible notes two different ways. The first group looks at convertible notes as essentially an equity investment with protections in the case that things should not go as planned. The second group look at convertible notes as a loan to the company, with the ability to take advantage of the upside if they should choose to do so.
It is important to understand a capital partner’s plans relating to conversion so as to give the company the opportunity to plan for repayment or equity dilution.
How important is a liquidity event and when?
Liquidity events are events in which company holders have the ability to sell or otherwise capitalize on the value escalation of their position in the company. The two most common liquidity events are public offerings and acquisitions, although contractual liquidity events, such as redemptions, as common as well.
Depending on the capital partner, a realistic plan for a liquidity event may be very important. From the investor’s perspective, their biggest fear is becoming a captive minority holder of equity in your company.
For example, an investor can purchase equity in a company, only to have the management team pay themselves higher and higher salaries, with no plan for a liquidity event. As a result, the capital partner is left with a lost investment and no return.
Do you engage in a lot of litigation?
It is not uncommon for emerging and middle market companies to experience delays when either repaying debt obligations or paying redemption prices. Growth requires substantial capital and many companies inaccurately budget for these events.
Most capital partners are understanding, to a degree, and will afford their portfolio companies leniency as to timing; others have no tolerance for delays and are quick to assert their rights. While many companies would accuse the latter group of “not being team players”, it is an unfair characterization as investors are entities to the benefit of the terms of their investment.
Understanding the character of your capital partners and their history, as well as proper planning and budgeting, can spare you a great deal of angst when payment deadlines are approaching.
What management positions have you held and boards of directors have you served on?
An investor’s past experience can be very valuable to a company. Many times, capital partners have past experience running and growing their own companies or companies.
Whether or not their past experience is in a similar industry to the company in which they are investing, having someone else with experience on a company’s team can help with strategic decisions.
An investor can also provide access to influencers, clients, supply chain partners, and additional capital.
Wondering what is best for your company?
We are always happy to discuss the funding and growth options available to a company. Please use the contact form below and a member of our team will be in touch shortly.