Browse > Home / Startups / Blog article: Raising venture capital while preserving your integrity

Raising venture capital while preserving your integrity

July 15, 2008

When do your fiduciary duties to your shareholders collide with your own integrity?  Many of us who have been CEOs of venture-backed companies have realized at one point or another that the current round under the current terms is a ‘bad deal’ for the new investor.  Even worse some of us realize that EVEN if we raise the current round things look grim for our business.  So when does your integrity outweigh your duty to your current shareholders?  Your lawyer (and I am not a lawyer) will tell you that you MUST serve your current shareholder despite your own opinion about the deal.  But what would your pastor say?

Last week I was having a conversation with an entrepreneur/friend who recently filed Chapter 7.  He had raised millions of dollars from local angel investors, but failed to close a professional round that would have kept the company alive.  He was very close to closing a professional round, but even he realized it would have been a bad investment.  Nevertheless he kept moving forward with the investors who ultimately pulled the plug.  This happened to me back in the summer of 2001.  We needed $100MM to break even, but instead we got a term sheet for $40MM.  I knew we couldn’t make it with $40MM and I wasn’t sure $100MM would get us there.  But the mantra, ’save the company’ kept beating in my ears.  Of course I convinced myself that if we could raise the $40MM would could live to fight another day.  Up until very recently I would have advised founders to ’save the company, save the company, save the company, save the company…’  Today I am not so sure ’saving the company’ is worth your integrity.

That was almost seven years ago and I would do things very differently today.  On the expense side I would cut expenses (headcount) much faster than I did.  I wouldn’t blindly follow the whims of investors against my own better judgement.  And I wouldn’t propose a deal I wouldn’t be willing to invest in myself. I used to be COMPLETELY against personal guarantees and in general I think they are a bad idea, but as a personal test before you take someone elses money, ask yourself if you would be willing to sign a personal guarantee to take the funding (rarely are you in complete control so I highly advise against signing one).  My advise to anyone in a similar position, if you can’t figure out a way to serve the interests of the existing shareholders as well as future shareholders you should resign.  Explain to your existing shareholders that you can’t, in good conscience, raise good money after bad.  Of course you should talk to your lawyer before doing anything so rash or crazy (I would and did).

Written by Alexander Muse · Filed Under Blog, Startups, Venture Capital 

Comments