How a Bad VC Deal Destroyed My Multi-Million Dollar Company

“This all looks pretty standard for a VC deal.”

That’s what the lawyer told me, flipping through the pages of the huge document. The long list of terms sounded foreign to me, but he was right. The agreement and its jargon were, and still are, typical.

Unfortunately, signing this “standard” contract caused me to lose my business, and the same thing could occur to you — or any other talented, successful entrepreneur.

I built a breakthrough model for a $20 billion industry at my kitchen table. I had the courage and hubris to imagine I could do it. When my advisors saw me forecasting $10 million by 12 months three, they laughed and said I used to be crazy. We made $22 million in 12 months three.

I built the model, evangelized the supply chain, inspired the team, and designed the technology while securing and maintaining exclusive, multi-million dollar, multi-year contracts with major brands like AT&T, American Airlines, Citi, Chase, and State Farm. I grew the company to #8 on the Inc. 500 list of fastest growing corporations and #1 on Crain’s Fast 50.

I used to be living a dream until it turned into a nightmare when I raised the mistaken enterprise capital.

The VCs were using every trick in the book to stop me from raising latest money. They sold the company in the middle of the night without me knowing. When they finally told me it was sold, they told me I had 3 days to say yes and asked me to not make things difficult for them. I said no and made things difficult for them. I went out and got an offer from a higher PE firm for $3 million greater than what they were offering; they still refused to sell. I attempted to fight them, but they were backed by billionaires who told my lawyers they “wanted nothing more than to go to war with this woman.”

I used to be devastated. So I made a decision to build a higher system for financing entrepreneurs and share my lessons with as many founders as possible.

Here are three strategies I wish I knew before I lost my business.

Be creative

Consider every alternative type of capital before deciding on PE.

• Raise capital. Find a profitable business you may take over, then contact an SBA lender to get a 7(a) loan.
• Equity is your most useful asset: the costliest debt is still cheaper than equity. Before you hand over one share of equity, collateralize personal loans, mortgage your property or automotive, or personally borrow the money from whoever will give it to you.
• Consider CVC. Corporate enterprise capital has expertise, vast infrastructure, and contracts, each internally and inside its supply chains.

Become a detective

There’s no option to break up with a bad VC investor — so take your time selecting an investor.

• Before you are taking a single dollar, take the time to learn every thing you may about who you’re getting into bed with. Ask for a list of all the corporations they’ve funded, check public records, and then pick up the phone and refer to the founders of the portfolio corporations. Research the ones that aren’t listed on their website and refer to those founders.
• Find out where the money is coming from. The people you are talking to are probably former accountants hired to administer the fund. Get to know the guys with the money. Break bread with them. Find out what sort of people they are. Make sure you wish them in your organization. Get the names of every GP and LP and do a thorough investigation. For as little as $99, there are many services and sites you should use to run Bad Actor checks.
• Does the fund have any past litigation? Search Case law database to ascertain if they were named in the lawsuit. I came upon too late that one of the billionaires in the fund that sold my company from under me is suing the Obama administration. He desired to block his employees from accessing contraception through the Affordable Care Act because of his religious beliefs. He should never have been on my cap table because our values ​​are so different.

Be your personal “lawyer”

The security agreement is not something that may be delegated. It is your responsibility to be your personal advocate, take it seriously.

• Go through each agreement, line by line, word by word. Know the terms. Make sure you understand every thing. Know the meaning and implications of every word in the agreement. Liquidation preferences, block rights, buyback rights, step-in rights, drag along, pari passu, preferred participation —these are all loaded guns.
• Get a second opinion to see if your attorney is right. Take advantage of free local business resources. There are 3,652 on helpforfounders.com.
• Know that it is unlikely that you’re going to have the option to defend yourself against a VC in court. There is no precedent for founders successfully defending themselves. Most founders who need enterprise capital do not have the money to pay for a lengthy case, especially against individuals who have it.
• Say no. The right partner will want you to feel comfortable. If not, walk away. Better to lose VC than lose your small business. Trust me.

There were so many things I didn’t know before I signed. The mistakes I made allowed me to be exploited. It took the burn to appreciate that the enterprise capital industry is broken, rigged against entrepreneurs, and favors those that are wealthy, white, and male while ignoring the majority of founders and the innovations that are needed. I hope these lessons and resources will give entrepreneurs reading this an edge over bad VCs.