Daniel, the general director of SaaS in the ESG compliance automation, has just closed the most significant travel offer of his startup. After three years of durability, the leader of the global industry signed as a industrial partner. It was a point of inflection he was working on. The agreement contained a side letter giving the partner an order or share of capital associated with a value that was expected to assist create. It also included a 90-day requirement to notify before any merger and financial event.
It was not the right to the first refusal. Only a notification. At that point, it gave the impression to be an honest price for growth. Two years later it became a barrier that he couldn’t do.
Here are three key lessons for the founders considering similar offers:
Long periods of notifications deter future buyers
After five years of writing checks, the first investors of Daniel were looking for liquidity. Potential buyers appeared but left after seeing the 90-day notification clause. Although there was no rofr, the buyers didn’t wish to submit a letter of intent and wait for the side, while one other page had visibility before.
The clause also lacked clarity when the notice period began. Was it after Loi, voting of the board or an oral agreement? This uncertainty itself was enough to scare off the offers.
Strategic partners can block growth by perception
Other large industry players, indirectly competitors to Daniel, but the potential competitors of the strategic partner refused to explore the partnership. They were afraid that any confidential industrial information may very well be made available up the river. Although there was no formal limitation, the perceived influence of the strategic partner meant that the company seemed closed to external cooperation.
The founder has lost control of the company’s trajectory
Five years after the first investment, Daniel got stuck. Any necessary movement, resembling raising a recent round, engaging buyers or establishing partnerships, first required him to seek the advice of his strategic partner. The clause, which he once perceived as a routine, turned into a veto in the way forward for her company.
The best strategy to avoid this case is to conduct a sincere discussion before signing. Adjust your expectations with a strategic partner and comply with a vibrant, short -term process.
For example, notify them inside two business days of receiving LoI and allow them to present a competitive offer. This is not a rofr, but it gives them an honest probability to participate. Also, narrow competitive restrictions on specific cases of use or regions, not general restrictions.
Legal clauses intended for alignment can become structural obstacles. It is very necessary to design them for long -term phrases for you and your shareholders.