By Sean Adler, CEO of GZI and an expert advisor at Founder Institute, GLG, Guidepoint, and AlphaSights.
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Your board of directors is likely to veto this. It can also be a blessing in disguise if you’re lucky enough to sign competing buy- and sell-side contracts without needing consent to place corporations in alignment. Here’s how to synergize competing exclusivity clauses for your private company within Financial Industry Regulatory Authority and SEC compliance.
1. Exclusivity clauses lock in both sides.
The federal government maintains a list of corporate entities legally capable of executing securities transactions for private companies. Run a search for FINRA-accredited funding portals and broker-dealers to access their databases on Broker Check. It’s all outreach from there.
FINRA regulations on buy-side term sheets mandate that only one funding portal can list a company for public solicitation at any point in time. This is similar to buy-side term sheets from private investors who use a no-shop clause to ensure they close with a portfolio company. The difference is that most private equity or venture funds have no accreditation at a federal level and are frequently dependent on investment banks to clear their exits or take their portfolio companies public.
Be sure to sign as many non-exclusive agreements on the buy side as possible because their terms are only valid if the referred term sheet is accepted.
Keep your corporate partners on both the buy and sell side in touch so they can work together for a positive sum game. This continuously empowers each respective partner your company signs on with.
2. Empower your crowdfunding investors and partners.
Crowdfunding raises close via the combined efforts of the platform’s internal network and the individual marketing efforts of a listed corporation.
Unlike traditional funds bound to LP agreements, crowdfunding investors can hedge risk the same way as public markets and the individuals participating don’t require ownership targets for the investment to be worthwhile since the platform is the entity seeking a majority stake.
Having dual buy- and sell-side listings allows you to work directly with your crowdfunding investors and the institution clearing the sale. Unaccredited investors were left out of private equity and are still excluded from sell-side involvement. The sell-side offering protects your crowdfunding investors, which is previously unheard of in private equity.
Look for crowdfunding portals that allow you to raise a priced round in common stock or simple preferred. This gives your company a legal valuation instead of a statement of value.
3. Generate flexible outcomes.
Private equity outcomes are still considered to be binary. Most entrepreneurs understand how this influences operations since the dynamic is geared toward exits within a set timeframe. This is due to internal constraints venture capitalists face within the usual 10-year shelf life of their fund. Changing the game from zero-sum to positive-sum by giving your partners a smaller percentage of the proceeds instead of larger outcomes gives companies both the ability to titrate up and take the classic valuation leaps private companies are notorious for.
This inverts the dynamics of exit scenarios for private companies since you can continuously list fundraises as negotiations close. Doing so provides your company flexibility through the infrastructure of your corporate partners. Investment banks already work both ends, so institutional investors won’t mind as much as individual investors because the institutional funds are likely signed on with the same investment banks as you.
Discuss this dynamic with your team to determine what kind of contracts are right for your company’s goals. Harmonizing competing exclusivity clauses can provide additional flexibility if your team agrees on the benefits.
4. Derisk operations for a positive-sum game.
SEC-compliant valuations ratify your company’s valuation in a way that most venture capital and private equity funds can’t unless they have the FINRA accreditation possessed by corporate venture capital or private investment banks. The due diligence for SEC EDGAR is more strenuous than the majority of private equity raises since it requires background checks, claims sheets, compliance checks under securities laws and a CPA review or audit. This is different from the more loosely regulated internal document checks, CPA certifications or reviews, customer and employee interviews and legal meetings for finalizing term sheets required by private equity investors. Passing SEC-compliant due diligence increases the credibility of your private company.
Apply the benefits of an SEC-compliant valuation to differentiate your company by spotlighting the certification and registration of the claim at a federal level so the public can trust your company. The additional credibility benefits both the buy- and sell-side contracts.
Using competing buy- and sell-side term sheets exhibits demand for your startup and benefits both sides because the supply is limited to one corporation on each side for the year.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
