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
Sponsored by the New Jersey Entrepreneurs Forum, the event costs $40.
"For every one invention that makes its way into profitable
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
of Morristown, he holds a bachelor’s degree from Yale with a major
in psychology (a useful tool in dealing with entrepreneurs, he
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.
over-value the technology and their own product or service. If it
can’t be installed and profitably sold, most investors would rather
invest in pet rocks.
Pinto sees a four-point valuation for most emergent firms, starting
with a thorough business plan. Second comes the validation of your
market research. Do these numbers reliably predict probable sales?
Only third in the valuation structure does Pinto place intellectual
property and patents. Equally important is the management that will
be launching this show. "A good investor will be betting on a
good jockey as well as a strong horse," says Pinto.
At this point Silverman, an attorney who also holds an engineering
degree, joins in. He agrees that solid, validated market research
is essential in getting funding, and says most entrepreneurs enter
the whole negotiating process with the wrong frame of mind.
Silverman says. "The deal is not to just get a check, but to
a business. It is the start of due diligence and time for managers
to earn their pay by translating intellectual property into a unique,
firm’s deal attractive to investors is its ability to meet
goals on time. Silverman notes that investors are lured by aggressive
milestones, but most are skeptical about a fledgling’s ability to
deliver. Any track record, however short, goes a long way toward
entrepreneurs shop for funding with a frightening innocence. Many
think only "what percent of my company must I give up for how
much cash?" In fact, probably the greatest blunder start-ups make,
he says, is turning away offered funds strictly on a fear of the
of stock they must yield to investors.
On the other hand, Pinto says, investors come to the table with their
own attitudes and hidden agendas. The wise entrepreneur will bring
to the term sheet a whole range of options suited to their needs —
and to his own. Investors will probably want preferred stock over
common. How should shares be linked to valuation? What are the
rates, the dividend provisions? What liquidation and conversion terms
can be safely, yet attractively, offered? Offering several investment
menus not only broadens your scope of potential funders, but displays
your business knowledge.
to lose control of your company on the term sheet clauses than on
the flat percentage of the business that you give to investors. This
second-most-frequent entrepreneurial blunder, as Pinto calls it, takes
many subtle forms. Veto power can be ceded to investors on many
issues, thus slowing corporate reaction time and hemming in
And unequal board representation can restrict the founders more
than stock control.
Silverman’s main worry is that control and actual stock percentages
will slip away through casual promises. "You can start the day
with 5,000 shares in your firm," he says, "and at the end
of the day, by making various off-hand remarks, you may have given
away the crown jewels."
— Bart Jacks
Corrections or additions?
This page is published by PrincetonInfo.com
— the web site for U.S. 1 Newspaper in Princeton, New Jersey.