Talk with any entrepreneur or person coaching startups and they will advise you to do your own diligence on the people you choose to work with. This includes investors, business partners, and potential collaborations. The process can be consuming and the relationships developed in the diligence process are strengthened because the entrepreneurs get to really know the people they work with.
Entrepreneurs are an optimistic group in general. They see the evidence of a possible deal and the thought of closing excites them. They have visions of growing the business because of the newly formed relationship. The idea that new money will fuel growth, a partnership arrangement will enhance the technology, or a new hire will accelerate the development of the company are exciting. The new arrangements allow for press that can facilitate the awareness of the company and the entrepreneurs have a chance to promote their company to the public.
The prospects of enhanced growth are always exiting. The work leading to the final deal arrangements take weeks or months. Properly documenting the deal means the legal costs skyrocket but it is worth the cost because the deal means so much to the company. The expended energy and funds to consummate the deal are part of the reason it hurts so much when the entrepreneur is “left at the altar!” This can happen even with fully executed deals. It is important to keep your options alive until the full closure of a deal.
There is no process by which you can be totally prepared for negative events. The best suggestion is; have backup plans even when you think things are going exceptionally well. Your best defense is always a good offense. Be prepared for negative events and keep the following examples in mind.
Financing: You approach many investors in the effort to fund the company. Investors exchange term sheets, negotiate a final deal structure, and conduct diligence on the company. Once you settle on the terms the lawyers take over and the parties hammer out a final deal. After executing the final documents, the closing date is set. On the date specified the funds are to be wired to your account and equity provided to the investors. You might think the deal is done once you sign the final documents, but that money is not yours until it is in your account and you are spending it. The fact is that the investors can elect to renege on the deal and sometimes will for no legitimate reason what so ever. Even the stellar class A type investors might select this option. You can take them to court, but that costs money. Your option: Keep other funding options and investors alive until you do close the deal. At least, you have a backup plan.
Partnering: When working with other companies, do not forget that you are not their only prospect. Like the case of the failed financing, partnering arrangements can fall apart after completing deal documents. For example, they may be seeking a buyout and it comes through before you close your transaction. They may be evaluating a second company for the same activity and decide the other company is a better prospect. The reasons can be anything. Your option: Keep alternative partnering discussions active until you fully close a partnering arrangement. Otherwise, you will have to start over again.
New Hire: One common issue is the new hire leaving too soon or before starting. You arrange all compensation terms, select a starting date and the employee gets a better offer before starting in your company. Maybe they became nervous about joining a startup with minimal funding. Your review of tentative new employees likely included interviews with other candidates. Sometimes it is a good idea to go back to one of them if your new person fails to join. Perhaps you elect to keep alternate candidates active until the position is filled. Even then, you still may lose the new person. Your option: Always keep a watch for great people that can join your company. This can make it a little easier if you need to fill a key spot.
You can follow Taffy Williams on Twitter by @twilli2861 and you can email him with questions at email@example.com or contact him via company contact info in the website. More Startup information is contained in his personal blog.