When I first met our potential investor, I had no intentions of raising capital from him.
At the time, I was merely searching for an advisor, entrepreneur, or someone that could provide some insight into some key areas where we had some concerns. As a group, we knew that our founder capital would run out at some point. But we were never focused on raising funds. It was always about building an incredible product first, gaining some traction and then searching for cash.
During our first meeting, we clicked on a few levels, but most notably, it was our energy. As I sat there and poured out our hopes and dreams, I could see his eyes light up as he began to make sense of my ramblings. Like many entrepreneurs, I couldn’t get it out fast enough and as I flipped through some very early UI, I could tell that he was hooked.
As it turned out, my chance meeting just happened to be with a very successful entrepreneur in the early stages of building a startup incubator.
Perfect, right? Well, we thought so too.
Our relationship continued and I invited him to our studio to get acquainted with the rest of the team. We talked about the product, our roll-out plans and some other details and by the end, it was clear that his interests extended past an advisor role. By the time he left he had given us some homework.
Our problem, from his perspective, was that our road map was slightly unclear and that potential investors would need to see a stronger vision. And so, our journey to raising capital began almost unwittingly.
Over the course of a month and a number of meetings, conversations and emails, he outlined his vision for the new incubator, his team and the fundamental differences between them and the traditional model. It would be bigger, stronger and last longer: they were committed to seeing their partners grow beyond a three-month educational program, typical with other incubators. Not surprisingly, we were sold.
So, we ploughed through weeks of strategic planning, meetings and design, and drafted our pitch. Along the way, he helped to refine it and made sure the flow was perfect for the big day.
A few weeks later, pitch day came and as promised, his team of heavy hitting partners showed up for the show. After a few hours, it was all over. They left and the energy still lingered in the air.
Another couple weeks passed and we finally got the call. We were in. We were going to be one of the first accepted teams into their incubator. We were over the moon about the news, but we knew that there was still a long road ahead.
Three weeks later, we received the terms and were told that we needed to reach "spiritual alignment" before anyone could move forward. We knew what they meant but it felt more like they wanted to make sure that we were willing to throw caution to the wind.
In all fairness, the valuation was fantastic. But it was the start of the end for our two groups.
The terms were pretty vague, but there were some immediate red flags for us. For starters, the deal was divided into two parts; cash and services split down the middle for equity. We knew this was coming but it started to unravel as we dug deeper into the agreement. The details were not adding up to us—but truthfully we were not in the best position to evaluate the agreement.
So, we set out to learn as much as we could as fast as we could. We started to consume everything we could learn about angel terms: articles, books, YouTube videos and anything else that would give us a little bit of insight.
Everything that we read and learned led us to believe that the agreement was heavily weighted to the investor. According to our research, relevant information was flat out missing from the terms or extremely vague, and we started to ask questions. Simple things didn’t make sense—milestones were unclear, cap-rates were missing and to top it off, it came with a very short irrevocable or exploding time period.
When it was finally time to sign-back our changes or start negotiations, all we really wanted was to understand more. We were not concerned with the structure of the agreement or the amount of equity that they were asking for; we were more concerned about jumping into the unknown. We needed clarity.
That was when things really started to change and I could feel the the momentum slipping away.
It felt like both teams went on defence and I firmly believe that our general investor felt the same way. Our goal from then on was to keep the two teams from throwing in the towel.
When their sign-back finally came back, it felt worse then the first round. We had even more questions and even more uncertainty. The capital structure even changed. Now, they wanted half equity and half debt with repayment terms starting at the end of 24 months. That didn’t scare us but the sudden shift in direction did.
It felt unorganized and it felt very ad hoc. The negotiations died soon after that.
In my heart, I knew that it was already over but it didn’t make it any easier when we got the call a week later. Months of work, negotiations and planning were now officially over. They let us down softly and told us that a stronger opportunity came along, but we knew what had happened. In the end, we were more upset about losing their insight than their money.
After the dust had settled, I believe the deal unfolded because of two reasons.
1. We were unprepared to fully understand some of the terms and should have had independent legal counsel ready to go.
2. They were completely unclear about the structure of their new incubator so we became their test bunny. Both problems could have been solved with a little more planning and due diligence.
Along the way, we made a few other errors. Most importantly, we got caught up in the excitement of raising future capital when we should have been focusing on our business at a critical time in our life cycle.
Thankfully, it didn’t take long to get back on track.