Here are Million Dollar Questions for your Investors
There are critical questions that few entrepreneurs ask their investors. These questions can be worth millions of dollars to you. You can ask them at any time, but they are best at the beginning of a relationship. Make sure you ask these questions and that you are comfortable with your investors’ responses.
Critical Question #1 : What is your position on secondary sales?
Many investors do not support the sale of stock by founders in later financing rounds. The thinking is that a hungry entrepreneur won’t let up or relax.
Your journey may be a long one. If there’s going to be no interim liquidity, it is best to know that upfront. I hold a contrary view. I believe a founder who achieves some liquidity while growing his/her company is freed and enabled to make bold moves — liberated from the risk of a zero. They can pursue a more significant win. A side-benefit is less personal pressure is placed on founders by their loved ones.
When some financial rewards realized, long-suffering partners, can see the actual success associated with the sacrifice and commitment. Their motivation and influence to support the journey solidified, they are less likely to push for an early exit.
In most cases, a candid conversation can enable you to reach an understanding. If your investors do not support secondary sales by founders, I suggest asking for the opportunity to sell ten to fifteen percent of your holding in follow-on rounds. The trade-off I usually reach is no new personal stock option grants for two years following a sale.
Critical Question #2: What is the status of your current portfolio?
The invisible hand influencing your investors is the pressure (or lack of it) on the timing and size of a return from your company. If your investors need a win for their portfolio, the impetus may pressure you to sell too soon. If they don’t, they may not want to sell at all. Understanding their environment and motivation is critical to understand what moves they may want you to take.
Critical Question #3: How many of your founder CEOs have you replaced within the first 18 months?
Some investors have a frequent pattern of replacing founder CEOs. Some companies outgrow their founders, of course, and many founders are happy to transition to another role. But if an investor makes a habit of replacing their founders, they will probably replace you. If you can
find and speak to those replaced CEOs, you will learn about your investor’s approach. Getting a company from zero to five million dollars in revenue is a wholly different skill set than taking it
to twenty million dollars. Of course, you may not want the CEO role after taking an investment. But if you think you will want it, talk about it with your investor.
Critical Question #4: Which co-investors do you prefer, and which do you dislike?
When accepting an investment, you are adopting your investor’s friends and enemies. It is best to know who they are as soon as possible. A long list in either category is reflective of the investor.
The answer also signals the investor’s potential to help or hurt when raising future rounds of capital. There are investors that some investors don’t want to work with again. It may not be a negative reflection on either party, but you need to know if you are limiting the universe of potential future investors. If many investors might opt-in or out, because of your investor, it is best to know that up front.
Critical Question #5: Will you price an inside round?
Consider a situation where you’ve made significant progress but didn’t have time to fundraise, so now you need capital. This is a fairly common situation. Your investor may not be able to price this second round as a matter of practice (or their formal investing terms ). The result is you take more money at the last round price — which may be fair or inappropriate. Having an investor who can and will price an inside round is a real advantage.
These are the million-dollar questions. If you don’t know the answers now, get them.
