The Crash Course
fledgling entrepreneurs found themselves across the table from high-powered
VCs, they had to learn to negotiate-fast.
Maureen Landers and Machie Madden were facing a daunting situation.
Late last year, the co-owners of the freshly minted New York-based
public relations firm LandersMadden, needed a cash infusion from
an outside investor to grow their company to the point where it
could bring in millions in revenue.
dealmakers were forced to rely on their own negotiation skills when
they managed to schedule their first meeting with a high-powered
venture capitalist and his lawyer, who were used to negotiating
intricate deals every day. Although they'd hired a good legal team,
their attorneys weren't as familiar with the nuances of the public
relations business as they were. "The lawyers didn't know our business,
and we didn't feel we could leave it in their hands," says Landers,
the kind of preparation one might do for, say, the bar exam. About
a month before the meeting, Landers and Madden began poring over
contracts so boring they could substitute for No-Doz so they could
understand every detail. Before the follow-up meeting about a month
later, the partners stayed up until the wee hours of the morning
almost every night, analyzing each document and ensuring they understood
the implications of every sentence. By the time they got together
again, "We knew each and every piece of those documents cold," says
Landers. "And we were able to catch things that the lawyers missed."
One of the
"missed" areas involved employee bonuses. From past experience,
Landers and Madden knew generous bonuses based on profitability
were necessary in the PR field, especially for an upstart. Not realizing
that industry-accepted practice, the investors had drawn up a contract
that capped the bonus at an unacceptably low level. Thanks to that
catch, the partners were able to add in a considerably higher bonus
was the matter of their equity stake. Originally, the contract read
that, if the pair tried to buy back their equity stake after two
years, they would have to pay 125% of the value of their share.
To level the playing field, they added in the stipulation that,
if the investors proposed the buy-back, Landers and Madden would
be required to pay 75% of the value.
initial meetings, of course, the partners didn't just rely on their
common sense and knowledge of the industry. Instead, throughout
the three-month negotiation, they sought the opinions of several
experienced entrepreneurs, who reviewed the contracts and offered
their advice. At the same time, Landers and Madden kept on doing
their homework right up to the last minute-the day before Madden's
wedding. Indeed, Landers spent four hours on the phone with lawyers
on both sides of the table that day, ironing out final details.
She arrived at the rehearsal dinner armed with a stack of contracts;
after the meal, the two spent an hour reviewing all the documents.
The deal they
finally struck was a good one. They received the cash they needed,
giving the investors a minority equity stake in their company in
exchange. The investors, New York-based efinanceworks, a company
that has since been reabsorbed by its two parent companies, General
Atlantic Partners of Greenwich, Conn., and Capital Z Partners of
New York, contributed an undisclosed sum, a portion of which was
prepayed for 18 months of services to the firm's portfolio clients.
now serves its own client base, along with several Capital Z Partners
and General Atlantic Partners portfolio companies. According to
Madden, they've been profitable since March and are on track to
make revenues of $1 million this year, a 50 percent increase over
the previous year. Naturally, to get there, the partners plan to
keep on doing their homework meticulously. "Nothing compares to
reading through those 100-page documents to make sure you understand
exactly what you're agreeing to and that there's nothing in them
that will make you vulnerable," says Madden. "It's incredibly tedious
work-but it definitely paid off for us in the end."
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