Securing Investors and Structuring the Deal 309
The Harvest. For many investors, the major returns are realized at the end of the invest-
ment’s life when the investor cashes out and harvests the profits. The details of the har-
vesting process can be negotiated and spelled out in the investment agreement.
Registration rights enable the investor to register stock, at company expense, for sale
to someone else. Because of restrictive regulation on the sale of private placement invest-
ments, investors are required to register their shares (an expensive and time-consuming
process) before they may resell them. The two most common registration rights are pig-
gyback rights and demand rights. Piggyback rights allow investors to sell shares on any
registration statement that the company makes with the Securities and Exchange
Commission for sale of shares to the public. Demand rights require the company to
register the investor’s shares for sale (at company expense) on demand— whenever the
investor wants. Demand rights are more onerous for entrepreneurs because they can
force the company to go public before it wants to. A demand registration exposes the
venture to the high costs and external pressures of public ownership (see Chapter 7).
Other forms of investor exit may be negotiated. The entrepreneurs can negotiate a
“put” contract, in which they agree to repurchase the investors’ shares at a certain date
for a certain price. If the put contract has a scale of dates and payment amounts, it can
be considered a warrant held by the investors. Other options include exit scenarios in
case of merger or liquidation. Entrepreneurs must be careful not to get trapped in a
situation in which an investor can call for the liquidation of the business or an immedi-
ate cash payout when a merger/acquisition occurs.
The investment agreement cannot anticipate all contingencies. Therefore, both sides
need to negotiate the process by which their rights under the contract can be modified.
For instance, such modification may require a two-thirds vote of the board.
Negotiations between investor and entrepreneur are paradoxical. While they are
going on, the two parties are in conflict since one’s gain is often the other’s loss.
Investors should be expected to do everything possible to secure the investment and
increase the potential for return. The wise entrepreneur should negotiate hard for eco-
nomic rights and provisions favorable to keeping control of the company.
Once the agreement has been reached, the two parties are partners and their gains are
mutual and shared.^21 After the investment is made and the proceeds are out into the ven-
ture, the relationship between investor and entrepreneur is more like a marriage and less
like a haggle over the price of beans. It would be extremely shortsighted for any party
to the investment to pollute the atmosphere of the courtship and have that carry over
into the marriage.
STRUCTURING THE DEAL
There is no perfect deal.^22 Everyone in a deal negotiation has to make tradeoffs that, in
the end, make it suboptimal for someone. At its most basic level, a deal structure organ-
izes a set of cash inflows and outflows. It describes what monies are coming into the
business as investment and what monies are going out of the business as payments in
the form of dividends, interest, and return of principal. At another level, the deal struc-
ture indicates levels of risk and reward and addresses the questions of who gets what and
