It can happen at any stage of the start-up life-cycle. After months or even years of success, you can just hit a wall. All the attractive options are gone and you're faced with a difficult decision: accept a horrible deal with a difficult partner or shut down the company.
It's a tough place to be in, and I've seen many start-ups go from apparent success to near failure over my years of working with them. Follow these four guidelines to keep your dreams (and your company) alive.
Maintain Your Nerve
You need to be willing to bring your start-up to the edge of the cliff and remain calm and decisive while doing it. This may be the most important tip--and in my experience it has been what separates true entrepreneurs from run-of-the-mill managers. You should never accept a bad deal if you do not TRULY have to. I’ve seen too many founders take the easy route and agree to terrible terms when holding out for just a bit longer could have reaped significant rewards. It is not a matter of being reckless--but rather of maintaining your composure, having a deep understanding of the risks and available alternatives, channeling your inner "hustler," and staying extremely focused on your goals.
Push Pride Aside
This is a really tough guideline to follow. You have spent the last few years building this business--it's your baby. Who does Investor XYZ think she is in proposing that ridiculous valuation? Where does Company ABC get off suggesting a two-year exclusive deal? Take a deep breath and think about the bigger picture! It's easier said than done, but success here depends a lot upon looking past the vanity components of the deal and focusing on what really matters. It may look like a terrible arrangement now--but it might give you the opportunity you need to keep this company alive, scale to new heights and shift negotiating leverage in the future.
Understand the Bottom-Line Implications
Once you have forced yourself to examine the situation objectively, you should lean on your lawyer to help you understand the real business and legal impact of the deal. How will it affect current customer relationships and your ability to compete in the market or license your software to others? How will future investors and acquirors react? Are there any outs? Contract terms can often look a lot scarier than they actually are. For example, being stuck in an exclusive arrangement is not ideal--but exactly how restrictive are the exclusivity provisions? Pages and pages of covenants can look like a huge burden--but how will they specifically impact your ability to grow the business?
In proposing harsh deal terms, your counterparties are often signaling their concerns about your current level of performance and your perceived ability to get the job done. OK, so what? You're an unproven start-up! Your attorney can help you think about crafting structural incentives that enable you to achieve a better deal in the long run. Perhaps you can propose living under those terms now but drafting the agreement in a way that gives you more leeway or benefits if you hit certain performance or financial targets? In counseling clients as they negotiate these tough deals, I've found that there is often room for creative solutions that are responsive to investor and partner concerns, yet at the same time allow the company to succeed in the long term.