Just like a marriage, relationships between founders and venture capitalists can go bad. Sheri Atwood and some of her investors differed on the direction the company should take. When founders and investors break up, it’s the board — not King Solomon — that decides who gets the company.
In December 2016, Atwood needed money to keep the company going. She closed a $4 million Series A round, bringing the total amount raised to $7 million. By August 2017, outnumbered by her board, she was fired.
Ironically, Atwood’s company, SupportPay, is about minimizing the conflict between parents who have split up yet she had an acrimonious split with some of her investors. SupportPay tracks and manages child support and expense payments. When Atwood received an email, along with other shareholders, that the company was liquidating and shuttering, she reached out to purchase the company herself but got no response. “I didn’t want the emotion to hinder the deal,” she said. Ultimately, Atwood made an offer through a proxy and bought back the company.
Her experience reinforces five lessons founders need to remember when looking for investors.
1. Ensure Values And Vision Alignment
“We needed the money to keep the company going, and I lost control of the board,” said Atwood. When you need money, you may think it doesn’t matter whom it comes from, but it does. The relationship between the founder and an investor is more than just money. “We were misaligned,” she continued. Make sure the long-term interest of investors and founders are aligned. Define your values and vision and make sure that your investors buy into them from the get-go.
2. Be Choosy
Investors are going to do due diligence on you, and you need to do it on them. Don’t just check the references that venture capitalists provide. Speak to other founders who have been funded by them. Ask probing questions:
- How does the investor handle speed bumps along the entrepreneurial journey?
- Would the founder take the investor's money again?
- What are the investor’s strengths and weaknesses?
- Did the founder call the investor when she was dealing with important issues?
3. Look For Tells During The Negotiations Process
“How does the investor handle push back from the entrepreneur,” said Lori Hoberman, a lawyer who provides advice to founders and VCs. The negotiation process should be a two-way street. If the VC plays a zero-sum, winner-take-all-game that is indicative of what the investor will be like once on your board. Be alert and go with your gut.
4. Focus On Revenue
Early on, Atwood was focused on revenue, but seed investors advised that she should focus on customer acquisition. She wouldn’t follow that advice now. If you’re making money, you have options when raising capital. You can wait for the right investor.
Don’t be fooled by the adage, “if you build it, they will come.” You can’t make money unless your customer base is willing to pay for your service. “If they’re not willing to pay for it, it is not worth your time and effort,” Atwood said.
5. Include An Out Clause In Your Terms Of Agreement
Talk to other founders about why and how their lawyers are writing terms of agreements with investors. Joel Gascoigne, co-founder and CEO of Buffer, knew he might not do an IPO or sell the company. As a result, one of his investors asked for a buy-back clause in their terms of agreement. When Buffer and the investor parted ways, “that became a starting point for negotiations,” writes Kimberly Weisul in Inc.
Since buying back SupportPay, Atwood has focused on rebuilding the website, releasing a new mobile version of the service and building revenue. ”Monthly active rates are four times what they were before, and revenues are five times higher,” she said. “We are profitable.”
How will you ensure that you won’t break up with your investors? If you do break up, how can you guarantee it will be amicable?
