Onboarding an equity partner via a secondary transaction can be a growth hack when done correctly. Especially for solopreneurs and owners of bootstrapped businesses, selling founder shares to an investor can be a total game changer. This is because of the security it buys them in return for liquidating a stake. A minority stake deal is often sought by founders who wisely seek to hedge their bet.
This is achieved by taking some money (and risk) off the table in a partial sale, which affords them the personal financial cushioning they need to take their business all the way. But for many founders selling stakes can also provide them with much-needed expertise and operational talent to help advise or run the business.
Depending on the motivation, this can also be an argument to why founders should think less about the price of their equity and more about finding the right fit who can contribute the most to the future value of the company. Adopting a screening process that considers the below points can greatly increase the odds of finding an equity partner fit for you and your business.
The first conversation a founder will have with an investor is different to a job interview in several ways but nevertheless having a few questions prepared in advance will help provide structure to the conversation and ensure the most important boxes are ticked.
Just like an investor will have questions about the business as part of their due diligence, the founder should consider who they are letting into their fold with care.
This includes standard resumé-type questions about their background, expertise and experience. A strong track record will not always include a portfolio of companies or even references but by simply asking questions about their proclaimed domain of expertise is a great way to ensure that the person in front of you is the expert they claim to be.
Another important line of questioning to employ during the first conversations should be more behavioural in nature, e.g. by creating hypothetical scenarios and placing the investor in the situation of having to make a choice. Asking them what they would do or how they would do it "if this and that" is an effective tool to gauge the fit.
Just be aware that these first few conversations are a two-way street, meaning investors will want to learn as much about the founder and their business as the founder will want to learn about them. Hence, one should try to anticipate questions the investor might have to best prepare for the “interview”.
This might seem obvious but good rapport is easy to underscore and forget when evaluating the fit of a prospect equity partner.
The hard skills and experience of an investor can vary in importance depending on the type of deal sought by the founder but since some amount of communication will be corresponded, the founder as well as the investor should feel a good connection in order to foster a solid professional relationship down the road.
A collegial relationship does not necessitate friendship but both parties should get along well enough to be productive and not counterproductive in their equity partnership.
Conversations around the business are of course the focal point of the matter, but don’t neglect discussing personal matters with promising buy-in candidates to determine whether you’ll get along.
Scheduling a few video calls to accrue some face time with investors is a helpful tactic to determine fit before signing the equity partnership agreement and a potential shared earnings agreement.
The founder and the investor ought to align on a few goals too. This includes an overlapping ambition for the business. Having both parties see eye to eye regarding certain things can save some headaches down the road.
This could for instance be the growth plan of the venture, the broader product roadmap, international expansion or exit strategies. The latter is important across all deal types and again here it can be helpful for the transacting parties to use what-if scenarios and jot down some timelines to the investment horizon, including for shared earnings agreements and majority buyout deals.
Conversation-starter topics to have could be about a potential acquisition offer, fundraising vs. bootstrapping, or how to grow the business internationally.
If necessary, these conversations can make their way through to the contract, for instance the equity partner agreement, to ensure that alignment on time horizons etc. are unequivocally integrated into the written foundation of the partnership.
Moreover, the investor and founder should align on how best to work together. Of course, the nature of a deal can be very prescriptive in that a minority, no-control stake sold probably entails the investor to take on a more passive advisory role rather than an active operational one.
Again, the use of contractuals can be leveraged to limit the ambiguities or rights on either side of the partnership.
In the earlier stages of the negotiations, founders with a more substantial asking price for the equity are prudent to inquire investors for proof of funds. Doing so early on for business angels can help avoid time wasted on conversations that don’t lead anywhere because the investor can’t afford to buy the equity listed.
Proof of funds or "POF" can be in the form of a bank statement or some other piece of evidence proving the means are at the disposal of the partner to follow through on their letter of intent to purchase the equity offered by the founder.
Taken together, these steps should help founders evaluate the business fit of investors, and vice versa, before signing any equity partner agreement.
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