When entrepreneurs raise capital, there are two things that are generally thought of as being most important: valuation and amount of capital raised. One attribute that is commonly forgotten is how friendly the capital is.
By “friendliness” we are referring to the covenants, adjustments, and resets attached to that capital.
Are there resets if you don’t hit certain milestones? Are there equity adjustments? How much control can this investor or these investors assert over your business? Do they have to consent to any major decisions?
In our opinion, the answers to these questions are far more important than valuation or the amount of capital being raised. Over the years, we have seen countless deals that start out 70/30 favoring the entrepreneur, and end 70/30 favoring the investor. We’ve seen entrepreneurs own less than 5% of their companies when they exited. ClearThink was founded to prevent these kinds of financial transactions. When we founded our firm, we made the conscious decision to only be on the entrepreneur’s side of the table, allowing us to have no conflicts of interest when finding the friendliest capital for an entrepreneur.