How to get really screwed by your board and investors in a scaled startup

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Helping startups grow with money and mentoring to the sounds of Crystal Castles
3 days ago3 min read

How to get really screwed by your board and investors in a scaled startup

TL;DR: Misaligned board gets worthy company to run out of cash and giant destruction of value ensues. Everybody wonders why, but no one can fault the logic behind the twisted sequence of events. Fingers pointed all around.

This prototypical story has been repeated too many times over (and it makes me angry, because it’s avoidable).

Say you have a business that’s bringing in $5M in revenues a month, you’re burning a little money but not too much and you’re a solid performer but not an obvious star.

Your board and investors are unclear about your future. Some would like you to sell, some would like to create more value. The discussion has been going on for six months now, and because the answer ain’t obvious, it’s inconclusive. Folks get frustrated. You’re wondering how the mood changed so suddenly.

Finally you give in to exit pressures and decide to “test the market”. In your heart, you think it’s too early, but you feel like you have to return the money to your investors. You try not to think of the preference stack. You hire an advisor, not a great one because, you know, you’re only a $100M or so mandate so the fees won’t be huge … and you go see whether someone wants to buy you.

M&A goes so-so. Maybe the offers are low, maybe a suitor takes you all the way to the altar and drops you. You hear a lot of “this is a bit early to sell, you should fix X and Y (which you knew already)”. Your “asset” is now burnt in the market and it will be a year or two before you can re-spin your story. You remember that advice about “good businesses get bought, not sold” and it makes more sense now.

Meanwhile your investors have lost interest. You’ve not been as focused on the day-to-day so performance has suffered a little, everyone is left with the perception that you are a bit of a B-player. Your VC board members are now under serious pressure from their partnerships: “we could not sell this one, so just make sure you make it on the available cash !”. People mentally move on.

You’re in the middle watching all this board back and forth, naively confident that, surely, if you’re short a couple of million, it won’t be too much of an issue to get it from your current investor group. After all, they’ve always been supportive.

When you do run out of cash, suddenly you realise the board is truly not aligned on your future. Without the prospect of future financing, you’re suddenly told you’re trading insolvent. It hits you like lighting. Didn’t see that coming ! You’re now scrambling to find a white knight before the administrators take over. You may or may not make it.

However this story ends, note the following : this scenario does not involve anyone being evil or ill-intentioned. Everyone is doing their job and being rational. Yet the end point is always the same. Through a series of short-sighted decisions and because no-one took the time to pause and ask themselves the hard questions, a worthy company is at risk of blowing up.

When you’re scaling, get a good chairman who can really help align board members and pull the alarm bell early. Ultimately though, it’s your job as founder to make sure your company is funded. If your board is bickering and misaligned, you need to take the steps necessary to ensure the survival of your business. Your duty to shareholders may well be to protect them of their own good selves. Don’t run out of cash and have a great Friday.

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    Fred Destin

    Helping startups grow with money and mentoring to the sounds of Crystal Castles

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