I have a million-dollar-a-year business developing and building custom laser application systems. I accepted a job with stringent requirements and failed to meet specifications. With the customer refusing to sign off on the delivery, I stand to go bankrupt. Do you think any investor would be interested in making an investment, and do you have any advice for me about my business?
What you have done is quite a remarkable accomplishment in our industry. Bankruptcy is the last resort because it sure would be nice to keep the business going. Hopefully, you can use the possibility of bankruptcy as a negotiation lever with your customer and creditors to give you some relief. Bankruptcy is a scenario in which no one gains except the bankruptcy lawyers. If you are forced into bankruptcy, you shouldn’t feel bad about it since bankruptcy laws are there to protect you from creditors, enabling you to emerge to start over again. There have been some significant changes in personal bankruptcy law recently, so you want to seek expert advice in this specialized area of the legal system. The impact on your personal wealth, for example, can be significant, whether you are a sole proprietorship or an LLC (limited liability corporation).
To get anyone to invest, you must first clearly address how investors are going to get their money back with a reasonable return. Otherwise, the only possible source of funds is from family and friends who are willing to do you a big favor. You do not want to borrow from the “bank” because loans are secured by assets, which could introduce undue financial risks to your family. A possible source of funds could be future customers who may be willing to provide advance payments to enable you to proceed with the work.
As for the future, you do not want history to repeat itself. Do not assume unnecessary risks. Our industry is obsessed with getting cutting-edge performance. Undoubtedly you can get more business staying at the edge, but taking undue risks could lead to dire consequences. I wish you the best in getting out of this jam.
I am about to get two term sheets from VCs. Should I disclose their names to each other? How do I get more time to get more VCs interested to make sure I get the best possible deal?
You must have a very good business proposition, as getting VC funding is no minor feat these days; VCs are well funded but are highly selective in making investments. A quick answer to your question is: No. You should partition them as long as you can. Having a term sheet is not the same as having money in the bank. The term sheet only provides a framework under which the investment would be made; it is NOT a commitment to invest. Also, the terms are subject to further negotiation and investors can back out of making the investment at any point.
I suspect you have an “exploding” term sheet, which gives you a limited time to accept the offer. So the best you can do is to try to keep the term sheet alive for a few extra days. Unless there are other investors who are far along with their due-diligence process, the likelihood is you won’t have the luxury of time to get another offer.
Like most entrepreneurs, you are focused on getting the highest valuation. You also may want to take into consideration the quality of money, or how a given investor can help you build your business. There is nothing more valuable than getting a partner with vested interest and heart in it to help you with your business. Your selection criteria can include, for example, whether the VC partner you work with has domain expertise as an industry insider, a reputation of supporting their companies in good times and bad, a history of making follow-on investments, and whether there is personal chemistry that will allow you to develop a working relationship with your team. You may seriously consider taking a chance to keep looking if you have concerns about any of these issues.
About the Author
Milton Chang
MILTON CHANG of Incubic Management was president of Newport and New Focus. He is currently director of mBio Diagnostics and Aurrion; a trustee of Caltech; a member of the SEC Advisory Committee on Small and Emerging Companies; and serves on advisory boards and mentors entrepreneurs. Chang is a Fellow of IEEE, OSA, and LIA. Direct your business, management, and career questions to him at [email protected], and check out his book Toward Entrepreneurship at www.miltonchang.com.