Brad Feld just posted about his dismay with the lack of understanding from a host of parties regarding financial statements. As a former lawyer, non-MBA type, I have had to do a lot of catch up myself in this area. Learning on the job has been beneficial. Here is Brad’s post.
Brad indicates that he intends to do a series on financial statements. I will re-blog them as they come out. Should be very useful.
In the past 3 or 4 days, I have received blog notices from Brad Feld, Fred Wilson and Steve Blank that they are on vacation. For Fred and Steve, I think the purpose was to let their readers know to expect fewer or no posts while they are enjoying a break (actually Fred’s is apparently a combination of work and vacation). For Brad, I think the purpose is to share his travel adventures, the status of his marital workings with Amy (his wife), his woes of getting adequate internet access on his phone, and what restaurants he is enjoying :).
All this vacation news got me thinking about CEOs and other executives giving notice about their vacation plans. While I think it is kind of funny that Brad, Fred and Steve feel compelled to let the world know that they are on vacation, the more important question to me is whether or not a startup board should know the vacation plans of the company’s executives. Assuming the answer is yes, what level of detail is needed?
I would seem to me that knowing at least a month in advance is probably best. Knowing where they are going would be good (but some folks might find that intrusive). But honestly, if someone is visiting Somalia it might impact some planning activities. I also think it is helpful to know whether or not the executive plans to be online while away or otherwise reachable.
As I write this, it all sounds like common sense. But I remember one instance where an executive took off suddenly just prior to the closing of a financing without notice. It caused some anxiety to say the least.
The flip side is true to me as well – key board members should make sure that they tell the CEOs when they will be on vacation. I will be out the week of July 25th, but will be online and otherwise reachable on my cell.
Anyway, I am interested to know what you think. Just don’t send pictures from your vacation……
Let’s take the following hypo: you are the CEO of Company XYZ, and you just raised $2mm in a Series A financing. In the financing there are 3 institutional investors and 4 high net worth individuals.
When a company has a bunch of investors (like the above hypo), it is important to understand that it is likely that not all of them will want to invest in future rounds (and this is particularly true with a mix of institutional and individual investors). Let’s assume that future equity financings will be needed as usually is the case.
If Company XYZ is performing really well at the time the next financing is needed, then it is likely that the existing investors will want to support the company by participating in the Series B round, but that is not always the case. Even is the Series B is an “up” round (simply meaning that the per share price of the Series B is higher than that of the Series A), some investors might not want to participate. An investor might not have sufficient available cash or there might be discord inside an institutional investor about Company XYZ.
If the company is performing well, and there are one or 2 existing investors that don’t participate in the Series B, this probably not very problematic – the other investors will invest a bit more than their pro rata or a new investor will show up.
If Company XYZ has not yet hit its stride, however, then the situation has the potential to get a little ugly. The participating investors might want to “punish” the non participants. You could replace “punish” with “make them feel some pain”. There are a variety of ways to dish out some pain in this context. Here are few:
1. Pay to play provisions: simply stated, pay to play provisions provide that unless existing shareholders participate in the subsequent financing unfavorable things happen to their existing stock. So, if a shareholder did not participate in the Series B, the holder’s Series A stock might convert to common stock or lose certain key provisions like liquidation preference. The impact to the non-participating shareholder can be quite dramatic. There are many (many many) ways to slice pay to play provisions.
2. Warrant kickers: A warrant kicker is a reward for participation. A warrant is the right to buy stock in the future as a set price (usually called a strike price). For example, participants in the Series B financing might receive warrants to purchase additional shares of Series B stock based on their level of participation. For instance, participants could get a warrant for 50% of the stock they actually purchased exercisable within the next 7 years. The impact of the warrant kicker is to dilute non-participants. As with pay to play, there are many (I will say it again “many many”) ways to slice warrant kickers too (for example, the strike price might be the same price per share as the Series B stock or might be one penny per share; or the warrant might be for common stock and not Series B).
3. Stock kickers: Stock kickers are very similar to warrant kickers except that actual additional shares are issued at the time of the given investment. So, if a shareholder participating in the Series B purchases $500,000 of Series B shares, the stock kicker might provide for the issuance of any additional $250,000 of Series B shares to the participant. In effect, the stock kicker lowers the immediate price of the Series B shares and immediately dilutes non-participating shareholders.
I want to reiterate that the “pain” devices come in many flavors and many variants inside each flavor. The composition of the given company’s shareholder base will also influence what strategies are most appropriate. This area is a potential mine field so make sure to get good advice before driving through it. The battles are typically between investors and do not involve the management team directly – so there is a silver lining for the CEO…..
I like passing along simple and useful advice. And, if written by someone else then all the better!!
I often hear the question, what should be in my startup fund raising deck? Here is a simple and well presented answer from Mashable.
ithaca VC 