How
to Get More Money and Share More of the Pain
There's a lot of misery to go around these days. And if you are
going to stay in the game, you need to distribute some to your investors, even
as you ask them for help.
Now that the Paycheck Protection Plan (PPP)
picnic is almost over, the really difficult conversations are about to start.
For an entrepreneur, it's actually pretty easy to ask a bank to lend you some
of somebody else's money (thank you SBA) especially when no one really expects
you to pay it back. Apart from the confusing and constantly changing
requirements and regulations, the lack of government and bank process
preparation, and the ethical dilemmas, it's been a lot like
the old TV show Supermarket Sweep. You run around like crazy,
grab as much as you can, spend it as fast as you can and hope somehow - even if
it's way too little and too late - that the "free" money helps you
hang on to some of your people and keep your doors open.
But, in all honesty, we pretty much know that
these belated and limited funds alone won't be enough to save tens of thousands
of businesses and likely millions of jobs. Congress will have to do much more
and even that won't get us there. There aren't going to be a lot of winners.
The new normal looks pretty grim all around, and the key for every business now
is to be a survivor. The pain is going to be felt across the board and, unless
it's promptly and fully shared by all the players, there's not much chance of
seeing things through to the other side.
So, what does that really mean for you and
your team?
It means that you're gonna have to go back to
the well for additional funding -- hat in hand, even though it's not really
your fault -- if you hope to make ends meet and to keep your company afloat.
And it's much, much harder to have to return to your existing investors when
the business itself is in limbo for nobody knows how long, and show them good
faith models (but really only best guesses) at what the future will bring and
then ask them to pony up follow-on dollars. Your goal is to make it
to year-end or to breakeven -- whichever comes first. There is nothing less fun
in tough times than being invited to a pro rata party
that no one wants to attend. Nothing at these meetings is ever good news
because nobody wants to be the turkey invited for Thanksgiving dinner.
But, if you're one of the millions of
entrepreneurs who knows that (a) the cash in the bank, (b) the PPP funds, (c)
the draconian headcount cuts, and (d) whatever slow-to-rematerialize revenues
may appear in the near term combined still aren't gonna be
sufficient to get you through the upcoming "L" trough and into next
year, you need to start planning your pitch and your approach right now.
Because there will be a long line of sad and sorry faces at these investors'
doors starting very soon.
There's no guarantee that you'll be
successful, but unless you're fully prepared with a strategy and a plan, you
can count on being the one holding the short straw when the new dollars get doled
out. Some of us have been to this movie many times and lived - albeit sometimes
pretty beaten up - to tell the tale. Here are 5 of the most important things
that I've learned over the years.
(1) Set a dollar goal that is higher than
you are necessarily comfortable with, and which leans toward worst-case
scenarios.
a. You won't get a
second chance to ask for money again from these folks, so you need to get all
that's available;
b. You won't get money from
all the investors who could contribute, and you don't have a lot of time to
wait around for people to make up their minds; and
c. Painting a rosy or
overly optimistic picture right now is a waste of time and will not be
believed. You're selling survival right now, not short-term success or a quick
turnaround.
(2) Set a per-share price for the new
dollars that comes out of a simple, mathematical formula where every investor
is expected to pay its pro rata share of the dollar amount to be raised.
a. If you need to raise
$1,000,000 and there are a million shares outstanding, the price per share is a
buck a share. For everyone. No side deals. No special deals. And no
negotiation. It's a formula and not a free-for-all.
b. If everyone participates
at their appropriate percentage, the company has more funding and the relative
ownership positions of the cash investors inter se are
unchanged. If you do not play, you will be penalized.
c. It's a hard pill for
management and employees to swallow, but their relative overall ownership
(through options, etc.) will be reduced when the company takes in the new
funds. This is probably essential to demonstrating the extent of their own
commitments to the company and its ultimate success. Lots of ways to fix this
issue down the line, but you've got to get down the line first.
(3) Set a short funding date in stone and
stick to it. No excuses and no extensions.
a. You need the money
now. Actually, you needed it a few months ago.
b. You need to keep the
pressure on the players, or they will drag their feet.
c. You need to be
prepared to penalize everyone who does not participate by the deadline. See
below.
d. You may have to step on a
few toes. Get used to it. You are working hard to save the whole
business - hard feelings are par for the course. Everyone's
"disappointed". Get in line.
(4) Set up a simple penalty system.
a. The shares which
would have been allocated to any investor who declines to participate
(unclaimed shares) are reallocated.
b. Each participating
investor receives its adjusted pro rata proportion of the unclaimed shares.
c. The adjusted pro
rata percentage number for each participating investor which will determine its
proportion of the unclaimed shares is a simple fraction that compares the
amount of each investor's new investment to the total amount of new funds
invested.
d. If Bob is adding $25,000
of a total new raise of $250,000, then Bob will get 10% (25/250) of the
unclaimed and reallocated shares of stock.
(5) Stick to your guns and get it done.
a. Don't waste time in
conversations with investors complaining about what they were promised, what
might have been, and how disappointed they are. Don't apologize - no one said
life was fair or that venture investing was easy or risk-free.
b. It's a simple question.
Are you in and with us or would you prefer to sit on the sidelines?
c. And remember, above
all, that as professionals, every one of these investors knew or should have
known what the risks were, and no one forced them to invest. They're
grown-ups and they should act like it. Especially since in 99 cases out of 100,
it's not their money anyway. But it is your livelihood.
Bottom line: The future isn't guaranteed or
promised to anyone. It's what you make of it and make it into every day. Pick
yourself up (it's not easy), dust yourself off, get the dollars and support you
need, and get on with building the best business you can build.