Strategic Investment: What should you know about it!

Strategic Investment: What should you know about it!

"I got an investor for my startup", a excited founder exclaimed when he met me a couple of months later. "That's it. Now I am successful! The Economic Times is covering it and my Marketing & PR Agent says, its time to be visible in the market! He even arranged me an interview in Radio Mirchi and we are being featured in Yourstory! Isn't that cool?"

"Wonderful news. How much & for what percentage points?"

"He said he will make an strategic stake in the company for $4 million. I still get to be the CEO of the company."

A couple of days later, I met him again in a bar all by himself with his hair disheveled and a sad face. We started talking and he was cursing his investor like anything!

"What happened? We thought you were successful and you closed the deal. aren't you happy with $4 million?"

"$4 million?? I got $5,000/- as my monthly salary and that's the only income I have. My investor took 35% stake in the company with a condition that he will get additional 20% stake at $20 million in the company after one year. My company would be valued at $100 million making me richer by $45 million against my 45% stake. Guess what? It's worthless as a junk piece of paper! I can't sell it as there is no buyer in the market! $45 million is just in books and headlines of newspaper. All I get is $5,000/- only when my investors are satisfied!

"But you took the deal with strategic investment. 35% was never mentioned before in media. Also, he promised you $4 million. You are the CEO of the company! You can decide how  and on what will $4 million & coming $20 million will be spent, including your own salary!"

"Yeah! I thought so. But he made me realise that it's his money! I'm just the CEO only for public and not for the company as he owns (55% of) the company. He has 55% stake! So, I can spend money only when he thinks, it's alright to spent! Virtually, I am the CEO who is rich with $45 million worth of share whose actual value is nothing. All my dreams of entrepreneurship is gone. I am just one of his many employees who has to stick unless the vesting time of 3 years expires to exercise my option to sell my entire stake."

" But the company is doing good. You made $5 million in GMV in first quarter of the year!"

" Yeah. But the profitability and revenue model of the company is still nowhere in sight. Not even in next 5-10 years, we can break even. GMV is Gross Value of Merchandise we handle and not the revenue we make! If we lose money like this, we need another investor soon and I will be stripped off of another 20% soon! And I can't sell my stake even then."

"One Kingfisher ultra please!" I turned towards bartender wondering how many founders actually experienced this and how many are yet to!

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