Speth discussed on This Week in Startups
You don't have enough money here. What are you gonna do. There's two final salvos you can do before selling or shutting down. 'cause that's kind of where you're getting to. There's actually three four actually one. You can run the company for free and not take salaries. I've seen people do it. You think it's crazy to you can get to break even immediately. Which is you cut half the staff your take on a consulting job and you raise your prices fifty percent and you figure out a model to get to break even or profitability so sort of cockroach mode on one end or just making severe cuts and raising your prices. Being more cutthroat getting to a place of stability is another option so one is run the company on fumes. Don't take a salary to cut staff rasiah prices and get to break even right A third one. Is this before selling your company or shutting down. The third option is to offer people Speth a sweetener a pot sweetener if they partake in this round in this bridge. So you say to. People were doing a bridge. And we're giving everybody warrants. We give them ten to one warrants. We five to one warrants. What that means is if you put it in one hundred k. We give you three to one warrants. We're gonna give you another three shares that you can buy at this price for every share. You bought now those warrants if the company succeeds. Let's say it was a dollar shave her so i gave you one hundred thousand four hundred years. I have the right to buy another three hundred thousand shares for three hundred thousand dollars anytime in the next ten years or five or whatever the the window is i would say between five and ten years is typically. What these warrants with us. So let's see the last ten years now. I have a free option. If the shares become worth two hundred dollars each. I can buy them for a dollar and get the other one hundred ninety nine fantastic. I can execute those warrants at any time and get great tax treatment long term capital gains and then with that pot sweetener can do is it can incentivize some people who are on the fence to get greedy and say you know what that's a pretty good deal. Okay i want to own more of the company and then finally pot sweetener then there comes the recap the deadly brutal recap. And what's a recap okay you know. We only have one investor who wants to invest. We raised a million dollars or twenty percent of the company. This new investor will put in five hundred k. But he wants the existing twenty percent of preferred shareholders to be common and they want to own for their million dollars. You know twenty five percent of the company but they don't want those other investors to get anything so that's called pay to play and pay to play means if you want to get advantage of that new round you have to put up money so it's kinda like putting a gun to the existing investors head and so much so that you can be sure you've burner investors and they probably will not work with you in the future if you do this technique. There are rare occasions where everybody knows. You tried your hardest. You communicated well with the investors and it just didn't work out. So what do you do you say. Listen we're recapping. The company fifty percent of the company was owned by investors thirty five percent of the founders fifteen percent volume -ployees were recapping the company all of the current shareholders will become common and they own twenty percent of the company the two founders out of the four. Who want to keep going. They're going to get thirty percent each. The new management team is going to get ten percent and the new investors who can get twenty percent. Whatever he come up with some formula like that and sometimes people will sign off on it. If you've presented it well and they feel like the other option is the company closed down if you do it and it's selfish like i own. Fifty percent of the company owns sixty percent of the company. I want ninety percent. I own forty percent of copy. Now i want on eighty percent. You probably are breaking securities law doing that because it's an inside transaction and you can get in trouble for that not that investors typically sue founders. They only do it. In the most extreme of cases i would say one out of every two or three hundred investments adventure firm might result in even the threat of legal action. Like this. because it's kinda like lighting off a grenade in a conference room like no priests going to get out of the conference room. You really do not want to go to war with your investors founders of the team and everybody because there's no time. We talked about runway earlier. There's no time for this nonsense. You pull the pin on that. Grenade homeroom blows up disaster. Everybody gets shrapnel nobody wins so founders have to very careful about this has investors you have to be disciplined and if you are keeping people up to date you are doing a great job as a founder so if the investors feel like you've kept up to date you send a the update you let them know what went wrong and you've really learned a lot from the mistakes you've made you'll increase your chances of getting that bridge round. If they in fact do bridge rounds some people literally have a policy that the firms they don't so here's an example of a bridge around that investor would probably pass on after looking at company acts And their request to be bridged. Your ten percent of the company okay. You've already placed a big bat. Yeah a lot of ownership and they have slow revenue growth. Not three times year-over-year year. They're going ten percent year over year. Or maybe they're declining ten percent. They're slow or no growth..