Too much of a good thing
When valuing your company too high, too soon can go wrong.
FanDuel, the famous sports gambling startup you've probably heard of, is being acquired for $465 million. Sounds like a pretty good thing, right? Well it is a good thing...depending on which side of the table you're sitting on. The founders and early investors of the company may not even see a dime of the near half-billion dollar merger, and it's for a reason you might not have ever thought: they sold too much equity in their company at too high a valuation. The result being a merger that will only net them enough money to pay off bigger, late stage investors, with not much left over for the people who started the the company. Once valued at a billion dollars, this latest transaction is coming in at less than half of that amount, and only $50 million more than the amount of money FanDuel took on in investments.
Often times investors who value your company and believe in your vision and ability to pull in a lucrative exit is a great thing. But as a CEO, one has to ensure efficiency in their use of capital and that the company isn't over-capitalizing, based on what revenue goals may be. Otherwise, this can result in "down-rounds" when trying to exit or invest further, and most venture investors have protections against such an event. In today's world of revenue-negative or even revenue-non-existent companies being the apples of VCs' eyes, it can be extremely difficult to properly value a company. However, whatever tools available to parties in such a transaction must be used to ward off potential exit or investment pitfalls down the road.
Regardless of the company's revenue goals or projections, or investment valuation/round, founder's should be aware of the implications of each investment and its terms. A good thing now might not be a good thing later. And as all founder's know, there's way too much hard work that goes into building a business to just give it away, especially when all it takes is an experienced eye to take a look at the structure of a company, its goals, and the terms being discussed in order to evaluate the proposed investment and its potential effects. No deal is a one-size fits all, but there are certainly industry norms both from a return expectation standpoint on the VC side, and from an equity sale deal from a founder perspective. And that knowledge can go a long way when it comes time to make a decision or negotiate a deal. That's what we'll help you do at Where's Legal?, P.C.