One evening recently I received an urgent call from a client. “We need your help, Rob,” the client’s anxious voice said. I asked what the problem was. “We have two investors, each offering a different type of deal and we can’t decide which to go with.”
Now, I realize that this qualifies as one of those “good” problems, one you’d probably love to have right now if you’re out raising money. Still, it was a real dilemma for my client. The long-term ramifications of accepting capital are significant because you’ll be in a relationship with the investor for years to come. The type of the investment deal, for example, a convertible loan, versus an equity investment or profit-sharing (or revenue sharing) arrangement, impacts the nature of that relationship and the growth trajectory of your company. But sometimes too much emphasis is put on the type of deal and too little emphasis on an even more important issue . . .
As I discussed my client’s dilemma I learned that in fact there were two potential investors, each offering a different deal — one would take a minority equity position, the other would take a profit share (or revenue share) but no equity. The amount of money offered by each was the same and sufficient to meet my client’s needs. So there was no need to take capital from both.
“Which one should we go with?” my client asked.
I’m sure he was prepared to go through an intellectual exercise with me to analyze the differences in the type of deal offered by each investor and how that might impact the company. Instead, I surprised him with a question:
“Tell me about each investor, how you get along with them, what type of attitude do they have, what do you think it would be like to have a relationship with each of them?”
He began to think about this, assessing his impressions about each investor. First he described the person offering the equity investment. “He is very critical. He has an air of superiority and talks down to us. He’s very smart and experienced in business, but not particularly warm or engaging. He thinks he knows more about our business than we do like he will tell us what to do, not engage in a conversation about strategy. He’s also fuzzy about how much time he really has for us.”
I asked my client to describe the other investor, who proposed to engage in a profit-sharing relationship. “We really like her. She is so full of energy and enthusiasm for our company. She loves to offer advice, her perspective, but she doesn’t tell us what to do or act as though she is superior to us just because she happens to have money to invest.”
My client paused…then asked, “So which one do you think is offering the best deal?”
“Both deals are roughly equivalent in terms of the stake the investor is asking for. The difference is you pay the equity person later if you sell the company or declare a dividend, while you pay the profit-sharing person quarter by quarter, assuming there are profits…but NONE of that is important at all compared to something else.
“What should I focus on then?” he asked.
“What did you just tell me about these two people, about the relationship with them?”
There was silence for a few moments, then the light bulb went on for my client. “I should take the deal from the person I’d rather be in a working relationship with, who brings an attitude I like, who feels like a partner, not a dictator.”
“Bingo,” I replied. “Life is short and challenging enough as it is. When you have the luxury of investors competing to fund your company, choose the one you trust, and the one who seems to trust you, assuming you can live with the terms of the deal.”
I’m sharing this conversation with you because recently I wrote an extended set of blogs in this space about the “Master Funding Equation.” If you’ve read them, you’ll recall that while there were several elements to the equation, trust trumped them all. (If you haven’t read this series yet, please do, beginning with the first post in the series.).
As I wrote in the Master Funding Equation series, indeed in an entire series just relating to trust, the reason trust trumps everything else is that without it no relationship can develop or flourish. Recall that there are two processes involved in trust, establishing it and deepening it. The process I took my client through that I summarized above for you involves what it looks like to establish trust. It’s a two-way street, both you and the investor must experience trust towards one another.
By assessing the nature of the conversations he had with each potential investor, my client was able to get a strong sense for where what I call “The Trust Bridge” was present and where it wasn’t. In this case, the investor offering the equity-based investment may have experienced enough trust in my client’s team to offer terms, but my client didn’t experience adequate trust towards that investor. The bridge was incomplete. With the other potential investor, the bridge was complete, with both sides trusting enough to create the conditions for relationship, thus for the deepening of trust over time.
Naturally, trust is comprised of a host of factors. From the investor’s perspective these include all the basics you would expect, such as a great team, the right team composition, a great product or service with significant advantage over incumbents, good fundamentals in your chosen marketplace (e.g., competitive advantage, prices, demand), your ability to communicate to the investor, including your apparent coach-ability. Each of these is a component of the Master Funding Equation because each is a component to establishing trust.
The new twist I’m sharing with you here, which we did not cover in the Master Funding Equation materials, is that you, too, need to be doing a trust assessment with each prospective investor. I realize that it’s uncommon to be in a position where you have multiple competing offers from investors at the same time. Obviously, when you are in that position, my advice is that if you can live with the terms, go with the investor for whom you believe that the Trust Bridge is complete.
The more difficult circumstance is what do you do when you have only one potential investor, you need the money, but you don’t believe the Trust Bridge is complete?
Dietrich Bonhoeffer was a Lutheran pastor in Germany at the time of the Nazi rule. Persecuted, arrested and eventually shot for his open statements against the brutality of that regime, Bonhoeffer wrote extensively while imprisoned. He urged people to first “count the cost” before taking bold actions. For Bonhoeffer, there was certainly risk in speaking out against Nazi rule. It cost him his life. Yet he did it anyway because for him speaking out was absolutely, unquestionably, the right thing to do. For Bonhoeffer, it was the only thing to do as a leading figure in the resistance movement inside Germany.
For you, the visionary leader of your company, counting the cost in advance when making important decisions is as critical as it was for Bonhoeffer because lives depend upon it — your own, your family, your employees, and their families, indeed all the stakeholders of the company. Recently, I provided you with a framework for making decisions frequently and boldly. Here I’ll simply add that the decision to accept or decline investment capital is one of the most important decisions you’ll ever make in business. While it may seem that the need for capital trumps everything else, consider that taking capital from a source with whom you haven’t completed the Trust Bridge could end up having far more negative consequences than having to struggle on financially until another potential investor shows up.
So, count all the costs before you say yes. If the Trust Bridge is incomplete, it may be better to say no.
- Trust trumps all else in the funding game
- Trust is a two-way street between you and your prospective investor(s)
- The Trust Bridge is built in the conversations you have with investors
- When choosing between investment offers, go with the one where the Trust Bridge is almost complete.
- Count the cost before accepting an offer from an investor where the Trust Bridge is incomplete