It’s Mostly About What Happens When Things Go Wrong

If you’ve ever spent time looking at loan documents, or equity investment paperwork, or almost any kind of legal document, you’ve seen there’s a lot of stuff. Terms. Clauses. Conditions. Boilerplate that numbs the mind.

Why is there so much stuff?

It’s mostly about what happens when things go wrong.

As an optimistic entrepreneur that took me a long time getting used to. We all want to be so positive about our upside, right? But in time I was mugged by reality, often, just like most business people.

Stuff happens. Not so great stuff happens.

Sometimes it’s little things, like missing your credit card payment by a day. Sometimes it’s worse, like your biggest customer leaves and your cash flow turns from positive to pretty negative, fast. Sometimes it’s really painful, like two business partners having a messy business divorce. (I’ve got scars from that one)

Not to be a Debbie Downer, but not so great stuff happens pretty regularly in business, alongside the really great stuff. Those of us who have been on the ride for a while are accustomed, or maybe addicted, to the ups and the downs.

For those on the other side of the money table – banks, grantors, equity investors, corporate partners’ lawyers – the predictability of not so great stuff happening translates into lots of legal stuff in financing documents. They see lots of businesses so they see lots of stuff happening and need lots of legal provisions “just in case.”

The simple statistics of failure include:

  • 50% of all new US businesses close by the end of their fifth year
  • 90% of venture capital backed companies aren’t successful
  • Business partner divorces are more common than personal divorces

If you are a highly optimistic entrepreneur it’s tempting to turn your eyes and convince yourself “it won’t happen to me!” But when you’re looking at financing terms it’s important to pay attention to the clauses that can really bite when not so great stuff happens:

  • Late payments that lead to much higher interest rates
  • Loan defaults that lead to loss of your personal house
  • Venture capitalists that fire you and dilute your ownership

This is why it’s important to pay attention to all of those mind numbing legal terms in financing documents. Not so great stuff happens, and you need to make sure you understand what the folks on the other side of the money table will do when it does.

 

Don Gooding

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