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“This all looks pretty standard for a VC deal.”
That’s what the lawyer told me as he flipped through the pages of the massive document. The long list of terms sounded foreign to me, but he was right. The deal and its jargon were, and still are, typical.
Unfortunately, signing that “standard” deal is how I lost my company, and how you — or any capable, successful entrepreneur — could suffer the same fate.
From my kitchen table, I built a disruptive model for a $20 billion industry. I had the guts and hubris to believe that I could pull it off. When advisors saw I was projecting $10 million for year three, they laughed and said I was crazy. In year three, we did $22 million.
I built the model, evangelized the supply chain, inspired a team and designed the technology, all while securing and maintaining exclusive multi-million-dollar, multi-year contracts with big brands like AT&T, American Airlines, Citi, Chase and State Farm. I led the company to No. 8 on the Inc. 500 list of fastest-growing companies and No. 1 on Crain’s Fast 50.
I was living the dream — until it became a nightmare when I raised the wrong venture capital.
The VCs used every trick in the book to block me from bringing in new money. They sold the company in the dark of night without my knowledge. When they finally told me it was sold, they said I had three days to consent and asked me not to give them a hard time. I did not consent, and I did give them a hard time. I went out and got an offer from a better PE firm for $3 million more than their deal; they still refused to sell it to me. I tried to fight them, but they were backed by billionaires who told my lawyers they “would love nothing more than to go to war with that woman.”
I was devastated. So I decided to build a better system for funding entrepreneurs and to share my lessons with as many founders as possible.
Here are the three strategies I wish I had known before I lost my business.
Be creative
Consider every alternative form of capital before signing over to PE.
- Acquire capital. Find a profitable business you can acquire, then get in touch with an SBA lender to get a 7(a) loan.
- Equity is your most precious asset: the most expensive debt is still cheaper than equity. Before you give up one share of equity, sign personal loans, put up the house or car, or personally borrow cash from whoever will give it to you.
- Consider CVC. Corporate venture capital has subject matter expertise, massive infrastructure and contracts either in house or within their supply chains.
Be a detective
There is no divorcing a bad VC — so take time to choose your investor.
- Before you take a single dollar, take the time to know everything about who you’re getting into the proverbial “bed” with. Ask for a list of every company they’ve funded, check it against public record, then pick up the phone and talk to the founders of the portfolio companies. Research the ones not featured on their website and talk to those founders.
- Find out where the money comes from. The folks you talk to are likely former accountants hired to run the fund. Meet the guys with the money. Break bread with them. Find out what kind of people they are. Make sure you want them in your business. Get the names of every GP and LP and do your diligence on them. For as low as $99, there are many services and sites you can run Bad Actor Checks with.
- Does the fund have any past litigation? Search the Case Law Database to see if they have been named in a lawsuit. I learned too late that one of the billionaires in the fund that sold my company out from under me had sued the Obama Administration. He wanted to prevent his female employees from having access to birth control through the Affordable Care Act because of his religious beliefs. He should never have been on my cap table because our values are misaligned.
Related: 3 Reasons Why A Lack of Funding Could Become Your Startup’s Secret Weapon
Be your own ‘lawyer’
The security agreement is not something to delegate. It’s your responsibility to be your own advocate, take it seriously.
- Go through every contract, line by line, word by word. Learn the terms. Make sure you understand it all. Know the meaning and implications of every word in that agreement. Liquidation preferences, block rights, redemption rights, step-in rights, drag along, pari passu, participating preferred — they are all loaded guns.
- Get second opinions to verify your attorney is right. Engage free local resources for entrepreneurs. There are 3,652 at helpforfounders.com.
- Know that it is unlikely you can defend yourself against VCs in court. There are no precedents for founders successfully defending themselves. Most founders who need venture capital don’t have the cash to pay for a drawn out case, especially against the people who do.
- Say no. The right partner will want you to be comfortable. If they don’t, then walk away. It is better to lose the VC than lose your business. Trust me.
There were so many things I didn’t know before signing on the dotted line. The mistakes I made allowed me to be taken advantage of. It took me getting burned to realize that the venture capital industry is broken, stacked against the entrepreneurs and favors those who are wealthy, white and male, while overlooking most founders and needed innovations. My hope is that with these lessons and resources, the entrepreneurs reading this will have a leg up on bad VCs.
