Corrections or additions?
This article was prepared for the January 9, 2002 edition of U.S.
1 Newspaper. All rights reserved.
Courtship by Contract
From that marvelous circle dance between investor and
inventor comes the stuff of which great businesses are made. If the
term sheet is artfully drawn, both sides will marry, move forward
and prosper. If not, the enterprise will founder, regardless of how
grand the idea or lavish its cash infusions.
Attorneys Rick Pinto of Smith, Stratton, a firm with offices
at 600 College Road East, and A. Jared Silverman of West Orange
present a role-playing workshop “Termsheets and Contracts”
Thursday, January 10, at 6:30 p.m. at McAteer’s Restaurant in
Somerset.
Sponsored by the New Jersey Entrepreneurs Forum, the event costs $40.
Call 908-789-3424.
“For every one invention that makes its way into profitable
production,
an armload of drawings sit moldering in the patent office,” says
Pinto. For the past 23 years, Pinto has mentored entrepreneurs in
joining that select few and helping them realize their dreams. A
native
of Morristown, he holds a bachelor’s degree from Yale with a major
in psychology (a useful tool in dealing with entrepreneurs, he
claims).
After completing the University of Virginia Law School in l978, he
moved to the Princeton area, and joined Smith and Stratton, where
he now heads that law firm’s business and finance practice.
The most successful entrepreneurs, in Pinto’s experience, all feel
the pinch of time. “It is better to make a good deal today, rather
than the very best deal a year from now,” he says. “After
all, a year from now you might not be here.” Determining how to
float today’s best possible deal amid a sea of options requires an
education most new entrepreneurs lack. Here are some of the points
to keep in mind.
Learn where valuation lies. Typically, most inventorsover-value the technology and their own product or service. If itcan’t be installed and profitably sold, most investors would ratherinvest in pet rocks.Pinto sees a four-point valuation for most emergent firms, startingwith a thorough business plan. Second comes the validation of yourmarket research. Do these numbers reliably predict probable sales?Only third in the valuation structure does Pinto place intellectualproperty and patents. Equally important is the management that willbe launching this show. “A good investor will be betting on agood jockey as well as a strong horse,” says Pinto.At this point Silverman, an attorney who also holds an engineeringdegree, joins in. He agrees that solid, validated market researchis essential in getting funding, and says most entrepreneurs enterthe whole negotiating process with the wrong frame of mind.Funding is just the start. “This is not pay day,”Silverman says. “The deal is not to just get a check, but tolauncha business. It is the start of due diligence and time for managersto earn their pay by translating intellectual property into a unique,salable product.”Emphasize your track record. Part of what makes a newfirm’s deal attractive to investors is its ability to meetprofitabilitygoals on time. Silverman notes that investors are lured by aggressivemilestones, but most are skeptical about a fledgling’s ability todeliver. Any track record, however short, goes a long way towardboostinginvestor confidence.Be willing to give up some ownership. Pinto says mostentrepreneurs shop for funding with a frightening innocence. Manythink only “what percent of my company must I give up for howmuch cash?” In fact, probably the greatest blunder start-ups make,he says, is turning away offered funds strictly on a fear of theamountof stock they must yield to investors.On the other hand, Pinto says, investors come to the table with theirown attitudes and hidden agendas. The wise entrepreneur will bringto the term sheet a whole range of options suited to their needs —and to his own. Investors will probably want preferred stock overcommon. How should shares be linked to valuation? What are theconversionrates, the dividend provisions? What liquidation and conversion termscan be safely, yet attractively, offered? Offering several investmentmenus not only broadens your scope of potential funders, but displaysyour business knowledge.Be careful about giving up control. You are more likelyto lose control of your company on the term sheet clauses than onthe flat percentage of the business that you give to investors. Thissecond-most-frequent entrepreneurial blunder, as Pinto calls it, takesmany subtle forms. Veto power can be ceded to investors on manyimportantissues, thus slowing corporate reaction time and hemming inmanagement.And unequal board representation can restrict the founders morestringentlythan stock control.Silverman’s main worry is that control and actual stock percentageswill slip away through casual promises. “You can start the daywith 5,000 shares in your firm,” he says, “and at the endof the day, by making various off-hand remarks, you may have givenaway the crown jewels.”— Bart JacksNext StoryCorrections or additions?This page is published by PrincetonInfo.com— the web site for U.S. 1 Newspaper in Princeton, New Jersey.
