This is the second installment of the two critical conversations you need to have – with investors and internally amongst current shareholders – before taking in new investment. In an earlier blog we discussed why you need to Value Your Company Based on Future Profit Potential and how to frame that conversation. In this blog we take a look at why it is critical that you get Alignment on Selling Shares & Major Decisions.

Investors look for a clear Exit-Strategy prior to investing. So if you want to obtain capital from equity investors then you need to develop a comprehensive Exit Strategy. It’s not good enough to simply say, “we plan on doing a trade sale or an IPO (whichever looks best at the time)”. I’ve read dozens of IMs that include this sentence or a variant to the same effect. I am an investor through Rights House and we also look for a clear plan on how the company’s CEO will drive value in the company and get an exit so that we can get our money back, and some.

To achieve alignment between current and new investors on the ‘Exit-Plan’, then it is logical that investors will want input into major decisions. Before the legal agreements go back and forth and you find yourself in the minutia of agreeing vetoes on this, vetoes on that, liquidation rights on this, etc, etc, a good way to get alignment is by looking at the elements of ‘Exit-Plan’.

A great ‘Exit-Plan’ should meet the Needs of every shareholder in their individual capacity. Assuming that a brother will act the same as another brother, is an unwise assumption. Some shareholders will trade-off a lower company value on exit for greater certainty on achieving an exit much earlier. “What are your needs? And if you get that, what will it give you?”

We encourage our clients to name the Target companies that will buy their company, i.e. a trade-sale. The business model of larger companies is not that difficult to observe. A review of their website will reveal a substantial amount about their sales channels. A review of their annual statements will reveal their revenue mix, product focus, geographic focus, headcount, etc. Setting your company up to be a logical acquisition target for a larger company requires research. But it is research well done – particularly if you want to make substantial profits and capital gains. “What other companies could we exit to? What would are company need to look like?”

If you are interested in making a return on investment for yourselves and your investors, then show it and start talking in terms of Share Price. Tell the investor that the share price will grow as a result of achieving a set of milestones.

Ask the investor, “What they have done in their past that might make growth in share price more certain“?

Put the three elements together and have a great conversation. Then put the outcomes of those conversations into an agreement. Don’t start with the agreement and work backwards. You are likely to see more disagreement starting bottom-up.