When a Good Deal Falls Apart

I just saw a good finance and management deal fall apart for bad reasons. Here’s a fix.

Your new venture is hunting for capital and a CEO to raise it. No customers, no revenue, no team. Just a brilliant idea and a patent. You dream about a $10m pre-money value. Investors whisper $3m. You offer a CEO 7.5% of equity - $750,000 in ‘value’… at $10m. Savvy CEOs walk away....

You accept the need to ‘pay’ $750k, so forget the percent, focus on the dollars. A candidate will say yes to 7.5%, assuming a close at $10m. If the raise comes in at $3m and you stick with your dollar figure, that’s 25% of equity. So, make a variable offer. A $4m valuation means 19% of equity; $5m - 15%; $7m yields ~10% equity. A sliding scale aligns the CEO with your high valuation goals. 

And don’t worry about being stuck if the CEO underperforms. Four year vesting plus the option to dismiss turns every CEO into an ‘interim CEO.’ After a year, dismissal will ‘cost’ under 2% of equity at YOUR target. Structure limits your risk and incents your new CEO.