Deal Structuring
Question & Answer
How can a founder remain in control a company when bringing an investor onboard?
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To structure a deal where the founder remains in control of the company, you would need to focus on negotiating the terms rather than solely considering the price. Here’s a broad outline of how you might approach structuring such a deal:
Equity and Voting Rights
- Dual-Class Share Structure: Introduce dual-class shares where the founder holds shares with higher voting rights compared to other shareholders. For example, the founder could hold Class A shares with 10 votes per share, while other investors receive Class B shares with 1 vote per share.
- Voting Agreements: Draft a voting agreement where the new investors agree to vote in alignment with the founder on key decisions.
Board Composition
- Board Seats: Ensure the founder retains a specified number of board seats or the majority of board seats.
- Board Observer Rights: Allow investors to have an observer role without voting rights, ensuring they can participate in discussions without diluting the founder’s control.
Protective Provisions
- Protective Covenants: Include protective provisions that still allow the founder to run day-to-day operations. For example, investors might require approval only for major decisions such as mergers, acquisitions, or significant capital expenditures.
- Founder’s Veto Rights: Grant the founder veto rights on certain significant actions, ensuring they maintain control over crucial company decisions.
Buyback Options
- Founder Buyback Option: Include a clause that allows the founder to buy back shares from the investors under predetermined conditions or timeframes.
- Callable Shares: Structure a class of callable shares that can be repurchased by the company or founder at a specified price.
Preferred Shares
- Non-voting Preferred Stock: Issue non-voting preferred stock to investors, which grants them preferential treatment in liquidation and dividends but no voting power.
- Performance-Based Vesting: Use performance-based vesting for equity grants, where the vesting conditions align with milestones that benefit both the company and the investors.
Exit Strategy
- Exit Clauses: Define clear exit clauses for investors that do not necessitate the sale of the whole company. For example, offering the right to sell shares to a third party with the founder’s approval.
- Drag-Along and Tag-Along Rights: Carefully define drag-along and tag-along rights to ensure the founder retains a strong position during any exit event.
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Deal Structuring
Buy the book today and dive into practical techniques that empower you to get started immediately, navigating transactions efficiently and maximizing your success in minimizing cash requirements.
In this book, you will:
- Be introduced to the fundamentals of deal structuring
- Learn 19 proven deal models for structuring deals
- Discover 39 key elements of deal nuances
- Access 32 actionable clauses for your term sheets
- Explore 9 specific deal structures
- Receive 257 pages of invaluable insights
- Gain the distilled expertise of 20 years