Essex Capital Group reposted this
President @ Essex Capital Group | Debt Capital Investment Banking Partner @ Essex Partners | Private Equity
Great info here. Our bridge loans check the box for funding growth without dilution and other founder pitfalls listed here.
Buying businesses and investing in the private market // Founder, PE & RE Fund, Advisor #BuyThenBuild
Jessica Alba built The Honest Company worth hundreds of millions. But she could be left with almost nothing due to a toxic investor clause. The brutal truth about how investors use "cheat codes" to steal from founders: Jessica Alba's Honest Company story reveals a dark side of venture capital most founders never see coming. Although it's valued much higher currently, for this simple example let's assume the company value is $104M. When the company hit $104M in value, investors can claim $100M through a hidden "2X liquidation preference" clause. Only $4M will remain for founders and employees to split after years of work. This wasn't bad luck - it was by design. Yes this is a simplistic example, and the company is valued higher now, but the fundamental point still remains: Professional investors load deals with "cheat codes" specifically written to be overlooked by excited founders. Here are the most dangerous clauses they use: • Minority Control: Investors with tiny ownership can control board decisions and block sales • Board Flipping Rights: They can remove founders from leadership overnight • Drag-Along Rights: Forces you to sell when investors want, regardless of timing • Anti-Dilution Protection: When value drops, investors get more shares while founders get crushed Each new funding round makes it worse, stacking new investor preferences on old ones. But there are ways to protect yourself: • Read every single term - don't get distracted by valuation numbers • Get a specialized venture lawyer who knows these traps • Fight for 1X liquidation preference instead of 2X/3X • Demand non-participating preferred stock • Keep investor blocking rights limited Your leverage peaks before signing. Use it wisely. Build strength before seeking funding: • Get to profitability if possible • Create competition between investors • Maintain a healthy runway • Never negotiate from weakness Consider alternatives to VC funding: • Revenue-based financing gives more control • Strategic partnerships can fuel growth without dilution • Sometimes the best venture deal is no venture deal Smart entrepreneurs are taking a different path: Instead of building from scratch, they're buying existing businesses. When you buy right, you: • Control all terms • Start with immediate cash flow • Have proven market fit • Own your destiny The game of money doesn't have to be rigged against you. Want weekly insights on buying businesses & building wealth through private markets? Join 50,000+ entrepreneurs getting proven strategies in your inbox, sign up here: walkerdeibel.com