The Myth of the Financial Transaction

By Jett Winter, CEO
Winter Advisors

You’ve just closed a $5 million dollar financing with a group of top-tier venture capital firms. You’ve made it. These guys really like me. They believe in me. From your garage to your first office space in Cupertino, CA, your dream is realized. You stretch back, put your feet up on your desk and dream of that beach in the Bahamas…while you revel in your new found success, your new investors are sitting in a boardroom on Sandhill Road beginning to look for your replacement.

What’s happening?

As an entrepreneur you have spent the last 12 months converting your idea into a plan and your plan into a product or service. You have been driving yourself and your founding team on pure belief in your vision. You now need to get capital to build your team and take your product or service to market. Getting financed is a major accomplishment for a young company – a very major step in the evolution of the business. But with this accomplishment comes a new game with its own set of rules.

The new expectation game following a professional financing will change every major component of your job.

Are you ready?

The Eight Financing Myths

The driving force behind theses myths is the post-financing dynamic of a new leader role combined with new investor expectations. This tension creates eight deadly traps that will snare most unsuspecting entrepreneurs.

Myth 1 – Financial Projections Don’t Count.

Can you hear the boos and jeers as disclose that you need to tweak the numbers, move a few things around, and reduce your current quarter’s revenue forecast by 50%? To investors, the financial projections are a primary measure as to the progress of their investment and the performance of the management team. To entrepreneurs financial projections are an educated guess as to what business is going to close, how revenue will be recognized, and in what timeframe. Many entrepreneurs view financial forecasts as simply an exercise to get funding.

Myth 2 – The CEO Role is the Same Post-Financing.

You not only have to satisfy customers, employees, and vendors, but you now have to keep investors happy. For investors it is all about expectation management, understanding the issues in the business, and clear communication. Investors don’t like surprises. The entrepreneur leads by inspiration and vision and wants the freedom to drive the business into the future without tight constraints. Unfortunately, the future is now.

Myth 3 – Cash Management is No Longer Important.

Imagine telling your investors that expenses are higher than expected and revenue is a little short based on a larger order slipping out of the quarter, but the pipeline is better than ever. Can I get an extra $1 million? The investors may give you the money, but generally at a big cost. Failure to manage cash effectively is how you lose control of your company.

Myth 4 – All Stock is Created Equal.

When starting the company, you probably issued one type of stock – common stock. Post financing you will probably have common stock, preferred stock, stock options, and possibly warrants. You may encounter vesting and reverse vesting. The investor will want controls in place to incent you not to walk out. They also want preferences in case of certain events like selling the business or shutting it down. These stock variants will dramatically impact the value you may receive for your business down the road.

Myth 5 – Customers Will Be Satisfied.

Customers will be happy that you received financing, but they really don’t care. What they care about is getting a great product or service at a fair price. As a matter of fact you’ve probably been spending less time with your customers and more time focusing on the financing. So customers may be ripe targets for your competitors following a financing.

Myth 6 – The Business Will Be Different.

With $5 million in the bank you believe that everything will be different. No, the value proposition of the business to the marketplace remains the same. The resources available to execute your plan will be greater, but the basic business will remain exactly the same as before the financing.

Myth 7 – The Board of Directors Really Doesn’t Matter.

In the past, your board meetings have been a rubber stamp supporting your ideas. Now you can’t do much without at least letting the board know your plans. Investors use Boards as a way to monitor their investment and monitor the performance of the management team. They can also create an environment on inaction if they begin to lose confidence in your ability or have an ulterior motive to replace you with a seasoned veteran.

Myth 8 – Back Salaries Will Be Paid.

Can you hear the laughter now, as you present a bill for $120,000 for back salary? Investors only want to pay for things going forward. Entrepreneurs want acknowledgement for their success in the past. Your founder’s stock is your compensation; back salaries are almost never paid.

Conclusion:

Many entrepreneurs are snared in the trap of at least some of these myths and emerge disappointed, angry, bitter, and in some cases with no job and no control over the company they started. To avoid these myths a proactive plan is needed that anticipates these obstacles and puts the entrepreneur on a path to maximize his investment while receiving just reward for his time, vision, and innovation.