The #1 Reason Founders Lose Control (Don't Make This Mistake!)

So yesterday I had an entrepreneur call me, and they were just a wreck. And the reason was they had sold their company and they expected to get a certain amount out. But what they didn't realize is when they sold equity in their company, when they raised capital, there were a bunch of terms that they signed off on that they didn't even realize that they were negotiating. And so here's the thing. The biggest mistake I see entrepreneurs make when they're. When they're raising capital and they're negotiating a deal with an investor is all they do is they focus on the equity. They want to own more of the company. So the entrepreneur who. I'm sorry, the investor who's a sophisticated investor, they know this up front. They know that that's what the entrepreneur wants. So they fight and they fight and they fight and they fight. While the entrepreneur is fighting for the equity, the investor is in the back of the document. And what they're doing is they're looking at two things I want to talk to you about today. Control. And they're looking at preferences. Now, what does control mean? How many times have you heard of an entrepreneur or CEO that went out and raised money? They were running their company and then they lost their job, they got kicked out of their own business. You see, what will happen is investors, even though they have less equity, can negotiate the right to make decisions around certain things. Who runs this company, who makes the key decisions, who signs the checks, things like that. So we always want to make sure that we're not just looking at equity, we're looking at control. You can own 99% of your company, and the other person can end up making 99% of the decisions. The second thing that you want to focus on is preferences. And what does this mean? A preference is basically at a high level, a multiple on what an investor is going to be able to take out when there's a financing event like a sale. So here's how it works. Say you have a business. To make it easy, you own 50%, the investor owns 50%. And now you've gone out there and you sold the company, you expect as the entrepreneur to split the money 50, 50. Well, what you didn't realize is when you raised capital and you signed your deal, the investor had negotiated a preference. So what that means is they not just get their money out, they get 1 times, 2 times, 3 times, 10 times their money out before you split 50, 50. So I can't tell you how many times an entrepreneur that I've worked with has had a sale, they've gone to get their money, and they've realized there were so many preferences for all the people that they raised capital from that those investors got all the money before there was anything left to split. So, again, make sure it's not just about equity, but you're also focused on control and preferences when you're working on your deal. And make sure that you always have a great attorney that's working for you.