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You want to buy a new company, expand operations, acquire a business, or raise capital. You’ve decided to go for venture capital funding versus a bank loan for a multitude of reasons from the risks involved to the amount you need to carry out your plan.

Do you know as much as you’d like about gaining capital? Most people don’t. Their expertise is in their business, not in capital funding. Here are ways to protect yourself from vultures, deals you can’t afford, and the nightmares of both.

Some quick explanations:

A venture capitalist (VC) is a person, group of people, company, or group of companies with money to invest in your business.

A VC broker represents you (or possibly a VC) and arranges the parties to create a deal. This article is about working with the broker.

Since many brokers are ethical, why such a negative slant? Over two months, two of our consulting clients nearly lost their shirts dealing with brokers. One broker tried to quadruple dip on a VC deal by taking a commission, bringing in another broker (who needed a commission), taking excessive points on growth targets, and adding interest fees into a contract making the deal impossible. Had our Boston-based client signed with his current and (estimated) future numbers, his decade-old business would have perished.

Another broker wanted a client in Connecticut to sign a broker-exclusivity contract, forcing our client to pay commissions on any type of financing, regardless of whether the deal originated through the broker or not. If an SBA loan or unrelated VC came through, our client would pay $400,000 in unearned commissions.

(With each client, the broker used four or more of the nine strategies below that would be harmful to your fulfilling your capital needs.)

Every deal has its own merits and challenges. Regardless, nine general tips to consider are:

1. Don’t sign exclusivity contracts barring you from finding your own funding. A) On one hand, a broker has every right to protect his intellectual property by preventing you from bypassing him and striking a deal with one of the contacts he’s introduced you to. B) On the other hand, beware of anything preventing you from gaining funding from any other source without going through the broker.

2. Avoid long-term cancellation clauses that hold you hostage for a year or more. Sixty to ninety days is reasonable. You’ve got to be able to move on. A broker’s objective in creating a long cancellation clause is to prevent you from securing funding with the VC they’ve introduced you to while at the same time making it difficult for you to find any funding. Keep your options open and agree to 90 days giving you time to find new opportunities.

3. Prevent double dipping. A savvy broker has multiple compensation channels: initial commission, commission on additional funding you get during a 1 or 2-year term, compensation if the business is sold during specified time frame, percentage of interest on monies lent, etc. Read fine print, several deals that have passed over our desks in the past 6 months have had hidden compensation clauses that would have made any deal difficult to swallow had they had signed with the broker. (Have legal representation from an expert in VC funding.)

4. Know the type of funding you want before you start searching, and bind your broker to the specifics with a contract. Looking for a VC with an equity position who wants shares and is interested in growing the firm, or do you just want financing? Initially, the two can appear similar. In one VC deal, the company looking for funding thought they were getting an equity partner, but the VC only wanted to achieve 3.5 times their ROI in 5 years in monthly fees and interest. The final terms of the agreement: the “receiver” would get $2.9 million, but would pay back $6 million in 5 years. It was not the deal he expected.
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So you’ve set some goals, you’re feeling ambitious, and you’ve promised yourself that you’re going to follow through. You’re determined to make this year better than the last. And hopefully, it works out that way. But you’ve seen the reality, too. In spite of a sensible plan and good intentions, most people find themselves off course by March. Imagine if you could uncover the cause, stay the course, and get what you really want. The answer lies in having a solid starting point…a strategic plan that really works.

Every year, we meet thousand of decision makers around the country in our consulting and speaking work. Like you, they’re smart, ambitious, and they’re doing a decent job. But, they’re also often frustrated that they aren’t doing better. When we break down the element for them, we find that few if any of them have a good strategic plan they can work from. In fact, most of them don’t even know how to create one.

The following is a mini lesson in strategic planning. We don’t have a lot of space, but here are some important things to know when creating a basic plan.

1. Know the difference between a strategy and a tactic. Strategy is the plan that defines where you’re going. Tactics are the things you do and use to get to the destination. Sounds simple, right? You probably already know this, right? Take a closer look at any list of goals; you will find that many of those goals are tactics. This is the reason most New Year’s resolutions and company goals are off track by March.

2. Be specific. A few words can make all the difference in the direction you take your firm, and the tactics you use to implement a strategy.

Vague statement: We will improve customer service response time.
Specific statement: We will improve customer service response time will drop 29%.
Can you see how a few words change the way you might approach a challenge or opportunity?

3. Engage the aging process. Like great wine, the making of a strategic plan takes time. A strategic plan is NOT built during a weekend retreat! It evolves out of thoughts, research, information, and experiences. Spend some real time developing a strategy so that it’s the right one for your organization. Not having a strategy is hard on a firm. But having the wrong strategy, because you just threw one together, can be disastrous. On the flip side, don’t let the time frame hinder you from doing something, at least. It’s better to have some type of plan to follow, even if it isn’t exactly what you want it to be today.
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