What, exactly, is a 90-Day Wonder? It's a special kind of deal. The kind where, 90 days after you sign the papers, you wonder why you ever did the transaction in the first place.
For many investors, each new deal and each new entrepreneur is a distinct set of experiences - some good, some not so much - and it's an ongoing education for both sides. It can be very instructive and also very painful. Education is expensive, no matter how you get it.
If you want to avoid the 90-Day Wonder, it helps greatly if investors and entrepreneurs have a little insight into the way the other works. In this column we'll look at the biases that can trip you up before you get to the term sheet. In the next column, we'll look at what happens when you get down to brass tacks.
At the outset:
Don't Starve the Baby
Building a business may take less money than it used to, but it still takes some basic amount of capital. In negotiating an initial deal, both sides are perversely incented to starve the business. The entrepreneur wants to conserve equity to avoid early dilution at a low valuation. The investor wants to put as little capital at risk as possible. The upshot: A very real chance that the business is undercapitalized from the outset and never has the resources necessary to get a serious start.
Go Beyond the Boy Wonder
The investor, not the entrepreneur, has to make sure that the final deal provides for the entire management team and for players who will be named at a later date.
Many entrepreneurs see their business as a mission and a sacred crusade. He or she would basically work for free. This isn't usually the case for most of the other senior people, especially if they were lateral later additions rather than co-founders or early members of the team.
Because entrepreneurs are so intensely committed themselves, they very often fail to appreciate the differing levels of commitment that exist among the rest of the members of their team. They almost always fail to adequately provide for the rest of their team when they are dealing with the investors. It's very rarely an issue of selfishness. Usually, it's just the fact that they're so focused that they're oblivious.
Ask the Hard Questions
Making an investment is very often a time-constrained process. In a typical business deal, everyone's in a hurry. Because everyone wants to get to a deal, bad and ultimately unworkable agreements get made on a frighteningly frequent basis. Here are some of the things to watch out for: