Know When to Take the Money

Sales are going through the roof. Distributors are calling daily begging to carry your product. Your suppliers are straining to meet delivery deadlines so you don't fall behind on production. A representative of a major Hollywood star wants several cases of your product delivered to the star's home for a huge celebrity event. Everything is happening far beyond your wildest dreams, and that, in a nutshell, is your problem.

Two months ago, you were emerging as the hottest deal on the market. Everyone was clamoring to invest in your company. You were looking to raise $2 million and you had more than $8 million on the table. And things got even hotter: Investors were buying the sizzle, before you even had the steak. Then it happened. You got hit with a blast of greed, blended with a good dose of optimism. You decided you didn't need the money, even the $2 million. Taking it all would dilute your ownership in the company, so why bother? For now, $500,000 would do, and besides, you could always raise more money later at a higher valuation. What unbridled optimism!

Now, four months later, you have a problem. The $500,000 that seemed like a fortune just a few months ago won't even begin to pay for the costs of producing enough product to keep up with demand. And you know if you lose this momentum, it could severely damage the future of your company. You need cash, and you need it fast. So what do you do? Go back to the investors you turned away just four, short months ago to see if they're still interested? Or try and find new sources of funding?

Let's weigh the advantages and disadvantages.

Going back to a previous investor
The advantages:

• They know the company.
• They know the value.

The disadvantages:

• They've been rejected.
• They see the blood in the water.

Finding a new investor
The advantages:

• They're fresh.
• They see the potential.

The disadvantages:

• They move more slowly.
• They, too, will see how desperate you are.

The example above illustrates a fundamental rule about raising money: When the money's on the table, take it. And here's why:

Rule #1: You'll always need more money than you think. You're right to worry about protecting your dilution, but don't go about it in the wrong way. If you're fortunate enough to have people wanting to invest more in your company than you think you need, remember this rule and take more than you think you need. Here's the trick: Don't take everything that's being offered--you want them fighting over who'll be able to get into this deal--and then negotiate the best valuation you can. This might mean doing one of two things:

Either negotiate a higher valuation for the entire investment, or have part of the investment come in now at the negotiated value and the next part come in nine to 12 months later at a higher valuation (this funding may be tagged to milestones). Either of these two strategies will minimize dilution for the founders and still work well for investors.

Rule #2: Never let your investors see you sweat. Even (and perhaps especially) when you're hot, you never want to come across as desperate. The ability to negotiate is built on the concept of leverage, and desperation erodes all leverage. Win-win situations rapidly become win-lose when the pendulum is out of balance.

Rule #3: Never get caught with your pants down. Plan for all contingencies. Adjust constantly. Have a Plan A, B and C for every possible scenario. Nothing ever works out exactly as anticipated, and your ability to react and adjust will determine your success. If you're not prepared for success, you'll have to pay the price to adjust. Will this mistake be fatal? In most cases, probably not. However, long-term rewards will be reduced substantially due to your short-term failure to plan. Don't make that mistake.