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Dealmaking: The Crash Course

When these fledgling entrepreneurs found themselves across the table from high-powered VCs, they had to learn to negotiate-fast.

First-time entrepreneurs 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.

The novice 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, 29.

Their solution: 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 structure.

Then there 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.

After those 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.

LandersMadden 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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