CSTouch Advisors

2025 Impact Report – Projects & Plans

CsT0uch12 — Sun, 28 Dec 2025 10:44:16 +0000

2025 Impact Report – Projects & Plans

Berytech brings you everything you need to know about due diligence and term sheet negotiation, written by Constantin Salameh, Senior Coach and Investment Advisor. This blog is a wrap up of a #FinanceFridays workshop.

There are two different key dimensions that matter in due diligence and term sheet negotiation: Economics (financial returns) and Control (freedom to take decisions). Find out more below.

What is a Term Sheet?

A term sheet is a written document that includes the important terms and conditions of a debt, convertible debt and/or equity investment transaction. The non-binding document summarizes the key points of the agreement between both parties prior to executing the shareholders agreement.

Term Sheet balances the following 2 dimensions:

Economics terms: Valuation, Anti-Dilution, Preferred Stock, ESOP, Liquidation Preference and Exit Provisions.
Control terms: Drag/Tag Along, Key Staff Appointments, Board of Directors, Reserve Matters and Vesting.

The term sheet is all about balancing the terms related to Economics or financial returns that the investors will get and the Control terms that restrict the founders’ ability to decide.

What are the types of term sheets ?

Grant Term Sheets with milestones when the donor is investing money in the company against specific milestones or metrics.
Debt Capital Term Sheets when the investor is lending you money which will be repaid over a period with interest charges.
Convertible Debt Capital Term Sheets when the investor is lending you money which can be converted to equity upon occurrence of a trigger or liquidity event at an agreed valuation.
Equity Capital Term Sheets when the investor is investing money in the company for a fixed percentage of shares.

Term Sheet Clauses Related to Economics

Valuation. Two valuation concepts to understand consist of Pre-Money Valuation (the value of the company before the investment is made) and Post-Money Valuation (the value of the investment after the investment is made).

Capitalization Table. A Cap Table is an overview of the total capitalization of the company. It tracks the equity ownership of all the company’s shareholders.

Funding Rounds. A company typically goes through different funding rounds (debt and/or equity) as it scales and transforms. Each funding round has a new term-sheet and shareholders’ agreement.

Preferred Shares. Preferred shares have typically more claim to the company’s assets than regular shareholders (A Class shareholders or original shares and B class shareholders with less voting rights than A Class shareholders) which can be of importance in the event of liquidation.

Liquidation Preference. Co Liquidation preference gives the investor the right to take out money before any other shareholders in a liquidation or an exit event. We have two types of liquidation preference : Participating Liquidation Preference (typically 1x) and Non-Participating Liquidation Preference.

ESOP. The Employee Stock Option Program (ESOP) is set-up to give a selection of top staff an option to buy shares of the company at a certain (subsidized) price at a particular time. Investors can require the founders to set aside anywhere between 5% to 10% for the ESOP from the founders’ equity shares.

Anti-Dilution. The objective of the anti-dilution clause is to protect the investor from dilution in case the company issues new shares in a later equity round at a price lower than the price paid by the investor in a prior equity round. Anti-dilution provisions protect the investor against a down-round by adjusting the prices of the shares to avoid diluting his equity shareholding position. Typically, Broad-Based Weighted Average Anti-Dilution clauses are the standard. Other options include Full-Ratchet Anti-Dilution clauses.

Exit Provisions. Investors and founders will generally both wish to work towards a successful exit of the company they co-own. As the time perspective might differ between the two parties and most investors must legally exit within a specific timetable (5 to 7 years), investors will include an exit clause in the term sheet to force an exit as and when they want. You have different types of exit clauses including forced sale, dragging founders out and forcing redemption.

Term Sheet Clauses related to Control

Reserve Matters. Early stage venture investors take a minority equity stake in the company that they are investing. It is important for them to protect their investment through Reserve Matters, which are a list of matters that can only be implemented with the consent of the investor. Most of these matters are focused on limiting the founders’ ability to take cash out of the business (CAPEX/OPEX investments, compensation of CXOs, etc.). Founders must work with investors to make sure that the list of reserve matters is reasonable.

Vesting Period. Investors are keen to ensure that the founders earn their equity over a “Vesting Period” of 3 to 4 years (25% per year over 4 years typically)

Board of Directors. Board of Directors run the company and take all strategic decisions (approval of the strategic plan and budget, approval of audited financials, major investments, etc.). The CEO is appointed by the board and all major authorizations are given by the board. Investors typically ask for a board seat to make sure that the proper governance foundation is in place.

TAG/DRAG Along. These are exit provisions used to protect shareholders’ rights. TAG Along clauses allow a party (minority shareholder) to tag along with other shareholders in the event the other shareholders are selling their shares to a third party. Drag Along clauses can be onerous as they allow the party (minority shareholder) at either a price agreed between the parties or at a price offered by a third party.

What is Due Diligence?

Due Diligence is a vital procedure in mergers and acquisitions aimed to confirm the validity and integrity of various aspects about the company

Due Diligence is used to:

Investigate and evaluate a business opportunity
The term due diligence describes a general duty to exercise care in any transaction. As such, it spans investigation into all relevant aspects of the past, present, and predictable future of the business of a target company.

Due Diligence sounds impressive but ultimately it translates into basic common-sense success factors such as ‘thinking things through’ and ‘doing your homework.’

Types of Due Diligence in M&A Transaction

Due Diligence process is comprised of several types of Due Diligence with different level of Management Team and Functions involved across the process

Strategic
Operational
Legal
HR
Financial
Commercial

Due Diligence Checklist

The checklist enables the due diligence process to ensure that the right choice of the investment is being made. This is not exhaustive.

General Corporate Structure: Provides business overview, acquisition and financial documents
Marketing & Sales: Competition, markets , customer and pricing channels, customer relationships & product branding
Products: Describes product lines, product life cycle, compare products and available capacity
Operations: Service / property management agreements, supplier data, asset financials, licenses, equipment & machinery
Human Resources: Organizational chart, personnel policies, employee benefits and occupational safety and healthy
R&D: Review R&D budgets, technical capabilities, skills sets and new product development list
Intellectual Property: Patents, trademarks, copyrights, non-disclosure agreements. Licenses and royalty agreements
Contracts: Supply contracts, Guarantees, Rebates, Warranty, Partner Agreements, Terms for purchase/sales
Real Estate: Deeds and titles, capital improvements, structural & mechanical, property surveys & appraisals, leases
Insurance: Current insurance policies, premiums and losses
Legal Claims: Litigations, contingent liabilities, waivers or agreements for claims, consent decrees, judgments
Environmental: Permits, facility inspection records, system repair and maintenance records, regulatory reports or audits

How to Negotiate a Term Sheet ?

The most difficult thing in any term sheet negotiation is to make sure that you strip it of the emotion and deal with the facts. Get your facts right and keep your ego out !

Get more than one investor (Business Angel, VC or PE) interested.
Understand typical term sheet clauses and related limitations well.
Understand the valuation methodologies and related assumptions.
Retain financial and legal advisors with fundraising experience.
List and prioritize your negotiables and non-negotiables.
Understand the dilution impact of your shares over the long-term.
Take the control of the negotiation process (not your advisors).
Due your own due diligence and view it as a two-way exercise.

Key learning for a successful term sheet

In listing the use of the funds focus on investments that will accelerate/validate scalability of the business model and strengthen its governance and control foundation.
Do your own due diligence and view the process as a two-way due diligence exercise. The credentials of your investor should be thoroughly assessed beyond how deep their pockets are.
Pay attention to liquidity events avoiding at all costs guaranteed exit events with valuation based on a multiple of forecasted operating profit or revenue. It should always be based on actual valuation.
Negotiate the exclusivity for the term sheet period not to exceed 2-3 months to avoid losing the interest of other investors.
Spend time in understanding the impact of the list of Reserve Matters on the decision-making process.
Always push back on the non-dilution and down-round protection clauses.
Negotiate the annual fees not to exceed 1% upfront and 0.5% on an annual basis.
Share the due diligence and legal fees among both parties. Do not accept to carry them alone.
Watch out for the list of conditions precedent to an investment by the investor. The longer and more complex the list, the longer the cycle for term sheet negotiation and closing the fundraising cycle.
Make sure that your documented metrics and milestones are realistic and that you can deliver on them.
Get at least 2-3 investors interested in your business model and your team. It will keep your preferred investor on his/her toes.
Be quick and smart in responding to the due diligence requests from your investor. It underlines your commitment to the transaction. Have your data room well prepared and documented.
A debt/equity transaction is for the long term so make sure that you select the investor (Business Angel or VC/PE fund) with the strongest alignment in values, strategic priorities and exit strategy/timing.
Avoid severe equity dilution in the first two equity rounds as you will go through 3-5 rounds and would prefer to have an interesting equity share at your exit to compensate for all your value creation efforts.
Always surround yourself with a competent and trustworthy legal and financial advisor with a proven track record in negotiating term sheets.
List and prioritize your deal breakers and be prepared to defend them through benchmarking.
Do your homework on compliance (tax and legal) and protect your Intellectual Property.

The due diligence and term sheet negotiation processes are critical moments to get to know your potential investor in depth. Depending on the clauses that they push (or don’t) you will get a good feel for what they really stand.

Latest Posts

The post 2025 Impact Report – Projects & Plans appeared first on CSTouch Advisors.

2024 Newsletter – Projects & Plans

CsT0uch12 — Sun, 04 Feb 2024 06:55:06 +0000

2024 Newsletter – Projects & Plans

There are two different key dimensions that matter in due diligence and term sheet negotiation: Economics (financial returns) and Control (freedom to take decisions). Find out more below.

What is a Term Sheet?

Term Sheet balances the following 2 dimensions:

Economics terms: Valuation, Anti-Dilution, Preferred Stock, ESOP, Liquidation Preference and Exit Provisions.
Control terms: Drag/Tag Along, Key Staff Appointments, Board of Directors, Reserve Matters and Vesting.

The term sheet is all about balancing the terms related to Economics or financial returns that the investors will get and the Control terms that restrict the founders’ ability to decide.

What are the types of term sheets ?

Grant Term Sheets with milestones when the donor is investing money in the company against specific milestones or metrics.
Debt Capital Term Sheets when the investor is lending you money which will be repaid over a period with interest charges.
Convertible Debt Capital Term Sheets when the investor is lending you money which can be converted to equity upon occurrence of a trigger or liquidity event at an agreed valuation.
Equity Capital Term Sheets when the investor is investing money in the company for a fixed percentage of shares.

Term Sheet Clauses Related to Economics

Capitalization Table. A Cap Table is an overview of the total capitalization of the company. It tracks the equity ownership of all the company’s shareholders.

Funding Rounds. A company typically goes through different funding rounds (debt and/or equity) as it scales and transforms. Each funding round has a new term-sheet and shareholders’ agreement.

Term Sheet Clauses related to Control

Vesting Period. Investors are keen to ensure that the founders earn their equity over a “Vesting Period” of 3 to 4 years (25% per year over 4 years typically)

What is Due Diligence?

Due Diligence is a vital procedure in mergers and acquisitions aimed to confirm the validity and integrity of various aspects about the company

Due Diligence is used to:

Investigate and evaluate a business opportunity
The term due diligence describes a general duty to exercise care in any transaction. As such, it spans investigation into all relevant aspects of the past, present, and predictable future of the business of a target company.

Due Diligence sounds impressive but ultimately it translates into basic common-sense success factors such as ‘thinking things through’ and ‘doing your homework.’

Types of Due Diligence in M&A Transaction

Due Diligence process is comprised of several types of Due Diligence with different level of Management Team and Functions involved across the process

Strategic
Operational
Legal
HR
Financial
Commercial

Due Diligence Checklist

The checklist enables the due diligence process to ensure that the right choice of the investment is being made. This is not exhaustive.

General Corporate Structure: Provides business overview, acquisition and financial documents
Marketing & Sales: Competition, markets , customer and pricing channels, customer relationships & product branding
Products: Describes product lines, product life cycle, compare products and available capacity
Operations: Service / property management agreements, supplier data, asset financials, licenses, equipment & machinery
Human Resources: Organizational chart, personnel policies, employee benefits and occupational safety and healthy
R&D: Review R&D budgets, technical capabilities, skills sets and new product development list
Intellectual Property: Patents, trademarks, copyrights, non-disclosure agreements. Licenses and royalty agreements
Contracts: Supply contracts, Guarantees, Rebates, Warranty, Partner Agreements, Terms for purchase/sales
Real Estate: Deeds and titles, capital improvements, structural & mechanical, property surveys & appraisals, leases
Insurance: Current insurance policies, premiums and losses
Legal Claims: Litigations, contingent liabilities, waivers or agreements for claims, consent decrees, judgments
Environmental: Permits, facility inspection records, system repair and maintenance records, regulatory reports or audits

How to Negotiate a Term Sheet ?

The most difficult thing in any term sheet negotiation is to make sure that you strip it of the emotion and deal with the facts. Get your facts right and keep your ego out !

Get more than one investor (Business Angel, VC or PE) interested.
Understand typical term sheet clauses and related limitations well.
Understand the valuation methodologies and related assumptions.
Retain financial and legal advisors with fundraising experience.
List and prioritize your negotiables and non-negotiables.
Understand the dilution impact of your shares over the long-term.
Take the control of the negotiation process (not your advisors).
Due your own due diligence and view it as a two-way exercise.

Key learning for a successful term sheet

In listing the use of the funds focus on investments that will accelerate/validate scalability of the business model and strengthen its governance and control foundation.
Do your own due diligence and view the process as a two-way due diligence exercise. The credentials of your investor should be thoroughly assessed beyond how deep their pockets are.
Pay attention to liquidity events avoiding at all costs guaranteed exit events with valuation based on a multiple of forecasted operating profit or revenue. It should always be based on actual valuation.
Negotiate the exclusivity for the term sheet period not to exceed 2-3 months to avoid losing the interest of other investors.
Spend time in understanding the impact of the list of Reserve Matters on the decision-making process.
Always push back on the non-dilution and down-round protection clauses.
Negotiate the annual fees not to exceed 1% upfront and 0.5% on an annual basis.
Share the due diligence and legal fees among both parties. Do not accept to carry them alone.
Watch out for the list of conditions precedent to an investment by the investor. The longer and more complex the list, the longer the cycle for term sheet negotiation and closing the fundraising cycle.
Make sure that your documented metrics and milestones are realistic and that you can deliver on them.
Get at least 2-3 investors interested in your business model and your team. It will keep your preferred investor on his/her toes.
Be quick and smart in responding to the due diligence requests from your investor. It underlines your commitment to the transaction. Have your data room well prepared and documented.
A debt/equity transaction is for the long term so make sure that you select the investor (Business Angel or VC/PE fund) with the strongest alignment in values, strategic priorities and exit strategy/timing.
Avoid severe equity dilution in the first two equity rounds as you will go through 3-5 rounds and would prefer to have an interesting equity share at your exit to compensate for all your value creation efforts.
Always surround yourself with a competent and trustworthy legal and financial advisor with a proven track record in negotiating term sheets.
List and prioritize your deal breakers and be prepared to defend them through benchmarking.
Do your homework on compliance (tax and legal) and protect your Intellectual Property.

Latest Posts

The post 2024 Newsletter – Projects & Plans appeared first on CSTouch Advisors.

2023 Newsletter – Projects & Plans

CsT0uch12 — Sat, 04 Feb 2023 06:52:54 +0000

2023 Newsletter – Projects & Plans

There are two different key dimensions that matter in due diligence and term sheet negotiation: Economics (financial returns) and Control (freedom to take decisions). Find out more below.

What is a Term Sheet?

Term Sheet balances the following 2 dimensions:

Economics terms: Valuation, Anti-Dilution, Preferred Stock, ESOP, Liquidation Preference and Exit Provisions.
Control terms: Drag/Tag Along, Key Staff Appointments, Board of Directors, Reserve Matters and Vesting.

The term sheet is all about balancing the terms related to Economics or financial returns that the investors will get and the Control terms that restrict the founders’ ability to decide.

What are the types of term sheets ?

Grant Term Sheets with milestones when the donor is investing money in the company against specific milestones or metrics.
Debt Capital Term Sheets when the investor is lending you money which will be repaid over a period with interest charges.
Convertible Debt Capital Term Sheets when the investor is lending you money which can be converted to equity upon occurrence of a trigger or liquidity event at an agreed valuation.
Equity Capital Term Sheets when the investor is investing money in the company for a fixed percentage of shares.

Term Sheet Clauses Related to Economics

Capitalization Table. A Cap Table is an overview of the total capitalization of the company. It tracks the equity ownership of all the company’s shareholders.

Funding Rounds. A company typically goes through different funding rounds (debt and/or equity) as it scales and transforms. Each funding round has a new term-sheet and shareholders’ agreement.

Term Sheet Clauses related to Control

Vesting Period. Investors are keen to ensure that the founders earn their equity over a “Vesting Period” of 3 to 4 years (25% per year over 4 years typically)

What is Due Diligence?

Due Diligence is a vital procedure in mergers and acquisitions aimed to confirm the validity and integrity of various aspects about the company

Due Diligence is used to:

Investigate and evaluate a business opportunity
The term due diligence describes a general duty to exercise care in any transaction. As such, it spans investigation into all relevant aspects of the past, present, and predictable future of the business of a target company.

Due Diligence sounds impressive but ultimately it translates into basic common-sense success factors such as ‘thinking things through’ and ‘doing your homework.’

Types of Due Diligence in M&A Transaction

Due Diligence process is comprised of several types of Due Diligence with different level of Management Team and Functions involved across the process

Strategic
Operational
Legal
HR
Financial
Commercial

Due Diligence Checklist

The checklist enables the due diligence process to ensure that the right choice of the investment is being made. This is not exhaustive.

General Corporate Structure: Provides business overview, acquisition and financial documents
Marketing & Sales: Competition, markets , customer and pricing channels, customer relationships & product branding
Products: Describes product lines, product life cycle, compare products and available capacity
Operations: Service / property management agreements, supplier data, asset financials, licenses, equipment & machinery
Human Resources: Organizational chart, personnel policies, employee benefits and occupational safety and healthy
R&D: Review R&D budgets, technical capabilities, skills sets and new product development list
Intellectual Property: Patents, trademarks, copyrights, non-disclosure agreements. Licenses and royalty agreements
Contracts: Supply contracts, Guarantees, Rebates, Warranty, Partner Agreements, Terms for purchase/sales
Real Estate: Deeds and titles, capital improvements, structural & mechanical, property surveys & appraisals, leases
Insurance: Current insurance policies, premiums and losses
Legal Claims: Litigations, contingent liabilities, waivers or agreements for claims, consent decrees, judgments
Environmental: Permits, facility inspection records, system repair and maintenance records, regulatory reports or audits

How to Negotiate a Term Sheet ?

The most difficult thing in any term sheet negotiation is to make sure that you strip it of the emotion and deal with the facts. Get your facts right and keep your ego out !

Get more than one investor (Business Angel, VC or PE) interested.
Understand typical term sheet clauses and related limitations well.
Understand the valuation methodologies and related assumptions.
Retain financial and legal advisors with fundraising experience.
List and prioritize your negotiables and non-negotiables.
Understand the dilution impact of your shares over the long-term.
Take the control of the negotiation process (not your advisors).
Due your own due diligence and view it as a two-way exercise.

Key learning for a successful term sheet

In listing the use of the funds focus on investments that will accelerate/validate scalability of the business model and strengthen its governance and control foundation.
Do your own due diligence and view the process as a two-way due diligence exercise. The credentials of your investor should be thoroughly assessed beyond how deep their pockets are.
Pay attention to liquidity events avoiding at all costs guaranteed exit events with valuation based on a multiple of forecasted operating profit or revenue. It should always be based on actual valuation.
Negotiate the exclusivity for the term sheet period not to exceed 2-3 months to avoid losing the interest of other investors.
Spend time in understanding the impact of the list of Reserve Matters on the decision-making process.
Always push back on the non-dilution and down-round protection clauses.
Negotiate the annual fees not to exceed 1% upfront and 0.5% on an annual basis.
Share the due diligence and legal fees among both parties. Do not accept to carry them alone.
Watch out for the list of conditions precedent to an investment by the investor. The longer and more complex the list, the longer the cycle for term sheet negotiation and closing the fundraising cycle.
Make sure that your documented metrics and milestones are realistic and that you can deliver on them.
Get at least 2-3 investors interested in your business model and your team. It will keep your preferred investor on his/her toes.
Be quick and smart in responding to the due diligence requests from your investor. It underlines your commitment to the transaction. Have your data room well prepared and documented.
A debt/equity transaction is for the long term so make sure that you select the investor (Business Angel or VC/PE fund) with the strongest alignment in values, strategic priorities and exit strategy/timing.
Avoid severe equity dilution in the first two equity rounds as you will go through 3-5 rounds and would prefer to have an interesting equity share at your exit to compensate for all your value creation efforts.
Always surround yourself with a competent and trustworthy legal and financial advisor with a proven track record in negotiating term sheets.
List and prioritize your deal breakers and be prepared to defend them through benchmarking.
Do your homework on compliance (tax and legal) and protect your Intellectual Property.

Latest Posts

The post 2023 Newsletter – Projects & Plans appeared first on CSTouch Advisors.

Due Diligence and Term Sheet Negotiation

CsT0uch12 — Mon, 27 Apr 2020 05:55:37 +0000

Due Diligence and Term Sheet Negotiation

What is a Term Sheet?

Term Sheet balances the following 2 dimensions:

Economics terms: Valuation, Anti-Dilution, Preferred Stock, ESOP, Liquidation Preference and Exit Provisions.
Control terms: Drag/Tag Along, Key Staff Appointments, Board of Directors, Reserve Matters and Vesting.

The term sheet is all about balancing the terms related to Economics or financial returns that the investors will get and the Control terms that restrict the founders’ ability to decide.

What are the types of term sheets ?

Grant Term Sheets with milestones when the donor is investing money in the company against specific milestones or metrics.
Debt Capital Term Sheets when the investor is lending you money which will be repaid over a period with interest charges.
Convertible Debt Capital Term Sheets when the investor is lending you money which can be converted to equity upon occurrence of a trigger or liquidity event at an agreed valuation.
Equity Capital Term Sheets when the investor is investing money in the company for a fixed percentage of shares.

Term Sheet Clauses Related to Economics

Capitalization Table. A Cap Table is an overview of the total capitalization of the company. It tracks the equity ownership of all the company’s shareholders.

Funding Rounds. A company typically goes through different funding rounds (debt and/or equity) as it scales and transforms. Each funding round has a new term-sheet and shareholders’ agreement.

Term Sheet Clauses related to Control

Vesting Period. Investors are keen to ensure that the founders earn their equity over a “Vesting Period” of 3 to 4 years (25% per year over 4 years typically)

What is Due Diligence?

Due Diligence is a vital procedure in mergers and acquisitions aimed to confirm the validity and integrity of various aspects about the company

Due Diligence is used to:

Investigate and evaluate a business opportunity
The term due diligence describes a general duty to exercise care in any transaction. As such, it spans investigation into all relevant aspects of the past, present, and predictable future of the business of a target company.

Due Diligence sounds impressive but ultimately it translates into basic common-sense success factors such as ‘thinking things through’ and ‘doing your homework.’

Types of Due Diligence in M&A Transaction

Due Diligence process is comprised of several types of Due Diligence with different level of Management Team and Functions involved across the process

Strategic
Operational
Legal
HR
Financial
Commercial

Due Diligence Checklist

The checklist enables the due diligence process to ensure that the right choice of the investment is being made. This is not exhaustive.

General Corporate Structure: Provides business overview, acquisition and financial documents
Marketing & Sales: Competition, markets , customer and pricing channels, customer relationships & product branding
Products: Describes product lines, product life cycle, compare products and available capacity
Operations: Service / property management agreements, supplier data, asset financials, licenses, equipment & machinery
Human Resources: Organizational chart, personnel policies, employee benefits and occupational safety and healthy
R&D: Review R&D budgets, technical capabilities, skills sets and new product development list
Intellectual Property: Patents, trademarks, copyrights, non-disclosure agreements. Licenses and royalty agreements
Contracts: Supply contracts, Guarantees, Rebates, Warranty, Partner Agreements, Terms for purchase/sales
Real Estate: Deeds and titles, capital improvements, structural & mechanical, property surveys & appraisals, leases
Insurance: Current insurance policies, premiums and losses
Legal Claims: Litigations, contingent liabilities, waivers or agreements for claims, consent decrees, judgments
Environmental: Permits, facility inspection records, system repair and maintenance records, regulatory reports or audits

How to Negotiate a Term Sheet ?

The most difficult thing in any term sheet negotiation is to make sure that you strip it of the emotion and deal with the facts. Get your facts right and keep your ego out !

Get more than one investor (Business Angel, VC or PE) interested.
Understand typical term sheet clauses and related limitations well.
Understand the valuation methodologies and related assumptions.
Retain financial and legal advisors with fundraising experience.
List and prioritize your negotiables and non-negotiables.
Understand the dilution impact of your shares over the long-term.
Take the control of the negotiation process (not your advisors).
Due your own due diligence and view it as a two-way exercise.

Key learning for a successful term sheet

In listing the use of the funds focus on investments that will accelerate/validate scalability of the business model and strengthen its governance and control foundation.
Do your own due diligence and view the process as a two-way due diligence exercise. The credentials of your investor should be thoroughly assessed beyond how deep their pockets are.
Pay attention to liquidity events avoiding at all costs guaranteed exit events with valuation based on a multiple of forecasted operating profit or revenue. It should always be based on actual valuation.
Negotiate the exclusivity for the term sheet period not to exceed 2-3 months to avoid losing the interest of other investors.
Spend time in understanding the impact of the list of Reserve Matters on the decision-making process.
Always push back on the non-dilution and down-round protection clauses.
Negotiate the annual fees not to exceed 1% upfront and 0.5% on an annual basis.
Share the due diligence and legal fees among both parties. Do not accept to carry them alone.
Watch out for the list of conditions precedent to an investment by the investor. The longer and more complex the list, the longer the cycle for term sheet negotiation and closing the fundraising cycle.
Make sure that your documented metrics and milestones are realistic and that you can deliver on them.
Get at least 2-3 investors interested in your business model and your team. It will keep your preferred investor on his/her toes.
Be quick and smart in responding to the due diligence requests from your investor. It underlines your commitment to the transaction. Have your data room well prepared and documented.
A debt/equity transaction is for the long term so make sure that you select the investor (Business Angel or VC/PE fund) with the strongest alignment in values, strategic priorities and exit strategy/timing.
Avoid severe equity dilution in the first two equity rounds as you will go through 3-5 rounds and would prefer to have an interesting equity share at your exit to compensate for all your value creation efforts.
Always surround yourself with a competent and trustworthy legal and financial advisor with a proven track record in negotiating term sheets.
List and prioritize your deal breakers and be prepared to defend them through benchmarking.
Do your homework on compliance (tax and legal) and protect your Intellectual Property.

Latest Posts

The post Due Diligence and Term Sheet Negotiation appeared first on CSTouch Advisors.

The Impact of the Health Crisis on the Startup Ecosystem Will Be Significant

CsT0uch12 — Tue, 31 Mar 2020 05:56:14 +0000

The Impact of the Health Crisis on the Startup Ecosystem Will Be Significant

Constantin Salameh – Senior Coach and Investment Advisor, has long experience in financing, supporting and developing startups. Since November [2019], he has run free crisis management workshops for entrepreneurs. For him, the challenges currently facing startups are daunting, but not insurmountable. [Salameh was interviewed for the April 2020 issue of the Commerce Du Levant.]

What is the impact of the COVID-19 pandemic on the sector?

The specific difficulty in the Lebanese ecosystem is the management of two simultaneous crises, one economic and the other health-related. In Europe, colossal sums have been mobilized for the private sector while in Lebanon, the state clearly does not have the means to set up an emergency fund to help startups. Without financial support, the impact of the health crisis on the ecosystem will be significant and is likely to last for three to six months. International organizations will certainly have a role to play in helping to pass the course.

In an emergency context, startups need to refocus their basic activity, identify key functions, and communicate with the most strategic customers and suppliers to adapt operations. It is perhaps easier for them to adopt a flexible operating model from a distance, as practices such as working from home or online meetings were already prevalent in the community.

What are the challenges related to the financial and economic crisis facing the country?

First, there is a major funding problem. The funds available are now very limited; those guaranteed by BDL circular 331 are frozen. For venture capital funds, the priority is to preserve the existing portfolio and protect the ecosystem built over the last five years, at a time when many startups are in danger of going out of business. Investors are therefore forced to be strategic and focus on the 10% or 20% of their startups who can afford to survive the crisis.

In this context, some investors have not been able to honor their commitments and in particular participate in new rounds. The startups that counted on obtaining these funds found themselves put on the spot overnight.

In addition, there are problems linked to the liquidity crisis, which affects all companies: difficulties in accessing the dollar, inflation, cash management, etc.

Finally, there is the challenge of retaining young talents, tempted to flee the economic situation.

Are there alternatives to 331 funding for startups?

We must bet on business angels and the Lebanese diaspora, part of whose fortune is stuck in the Lebanese banking sector. In fact, for the latter, investing in investment funds or directly in startups is a way to get their money out of the banks and to diversify their assets, in the same way as other categories of assets such as bonds , gold or real estate.

On the other hand, some international donors, such as development agencies or international NGOs, have expressed interest in structuring new funds. They could, for example, vouch for investments.

Both Lebanese investors and international donors are aware of the importance of the sector, and the mess it would be to abandon an ecosystem rich in innovation. Everything must be done so that startups can keep part of their services and teams in Lebanon.

What immediate solutions do you recommend to limit the effects of the crisis?

There are a series of steps to take. To get around the restrictions on the dollar for example, opening a bank account abroad is a priority, it is a service that several banks already offer to Lebanese companies, especially in Cyprus or Dubai. It is absolutely necessary in order to be able to be paid by customers resident outside Lebanon and to pay suppliers abroad.

Targeting international markets is also a means of obtaining foreign currency liquidity. The local market was limited anyway, with an annual growth of around 1.5% in the past eight years, and is now in the midst of a recession. This can be done either through a distributor, a franchise, a joint venture or even the creation of a branch.

It is also necessary to reduce expenses, for example by converting part of the fixed costs (salaries, rent) into variable costs according to turnover or by replacing imported products as much as possible with local products.

Finally, to encourage talents to stay despite the crisis, it is, for example, possible to convert part of their salary into ghost shares, allowing employees to benefit from the appreciation of the value of the company without transferring ownership . It’s an ideal way to retain employees and involve them in creating value.

The important thing is to have transparent governance and to establish a clear communication plan on crisis management. As difficult as it may be, a crisis is an opportunity to reinvent yourself as an entrepreneur.

Which startups are best equipped to deal with the situation?

The startups, which employ local labor and produce in Lebanon while exporting their goods or services, are in a rather advantageous situation, since they benefit from the depreciation of the pound against the dollar. And Lebanon is not lacking: among the startups financed through the various funds and accelerators, some generate more than 95% of the turnover abroad.

Those working in more innovative sectors than others, such as fintech, agritech and cleantech, are also better placed. Finally, in a context of crisis, donors are looking closely at the social impact of startups.

But if some startups manage to get by, this is not the case for all. Those who import to sell on the local market are hit hard by the depreciation of the currency and have no room for maneuver. Some of them have already had to shut down.

What future for the sector?

I am convinced that startups have a key role to play in the economy, today and tomorrow. Technology is an essential economic sector, it is a catalyst for change that drives innovation in all sectors, it is what allows us to have real added value in our products.

So I’m optimistic about the future of the ecosystem. We have the talent. We are at the heart of the crisis, but we are not the first country in the region to have experienced it. The crisis will eventually pass, we must prepare for the future.

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L’impact de la crise sanitaire sur l’écosystème start-ups sera important

CsT0uch12 — Sat, 21 Mar 2020 05:57:16 +0000

L’impact de la crise sanitaire sur l’écosystème start-ups sera important

Disclaimer: This article was originally published in Le Commerce Du Levant on March 27, 2020

Conseiller financier, Constantin Salameh possède une longue expérience dans le financement, le soutien et le développement des start-up. Depuis novembre, il anime des ateliers de gestion de crise gratuits à destination des entrepreneurs. Pour lui, les défis que rencontrent actuellement les start-up sont de taille, mais pas insurmontables.

Quel est l’impact de la pandémie du Covid-19 sur le secteur ?

La difficulté spécifique à l’écosystème libanais est la gestion de deux crises simultanées, l’une économique et l’autre sanitaire. En Europe, des sommes colossales ont été mobilisées pour le secteur privé alors qu’au Liban, l’État n’a clairement pas les moyens de mettre en place un fonds d’urgence pour aider les start-ups. Sans un soutien financier, l’impact de la crise sanitaire sur l’écosystème sera important et risque de se prolonger sur une période de trois à six mois. Les organisations internationales auront certainement un rôle à jouer pour aider à passer le cap.

Dans un contexte d’urgence, les start-up devaient recentrer leur activité sur les compétences de base, identifier les fonctions-clés, et communiquer avec les clients et fournisseurs les plus stratégiques pour adapter les opérations. Mais il était peut-être plus facile pour elles d’adopter un modèle de fonctionnement flexible à distance, car des pratiques comme le télétravail ou les réunions en ligne étaient déjà répandues dans le milieu.

Quels sont les défis liés à la crise financière et économique que traverse le pays ?

Il y a d’abord un problème majeur de financement. Les fonds disponibles sont désormais très limités, ceux garantis par la circulaire 331 de la BDL sont gelés. Pour les fonds de capital-risque, la priorité est de préserver le portefeuille existant et protéger l’écosystème bâti ces cinq dernières années, au moment où de nombreuses start-up risquent de mettre la clé sous la porte. Les investisseurs sont ainsi contraints d’être stratégiques et se concentrer sur les 10 % ou 20 % de leurs jeunes pousses qui ont les moyens de survivre la crise.

Dans ce contexte, certains investisseurs n’ont pas pu tenir leurs engagements et participer notamment à de nouveaux tours de table. Les start-up qui comptaient sur l’obtention de ces fonds se sont ainsi retrouvées sur le carreau, du jour au lendemain.

À cela s’ajoutent des problèmes liés à la crise des liquidités, qui touche toutes les entreprises : difficultés d’accès au dollar, inflation, gestion de la trésorerie…

Enfin, il y a le défi de retenir les jeunes talents, tentés de fuir la situation économique.

Y a-t-il des alternatives aux financements de la 331 pour les start-up ?

Il faut miser sur les business angels et la diaspora libanaise, dont une partie de la fortune est coincée dans le secteur bancaire libanais. De fait, pour ces derniers, investir dans des fonds d’investissement ou directement dans les start-up est un moyen de sortir leur argent des banques et de diversifier leurs avoirs, au même titre que d’autres catégories d’actifs comme les obligations, l’or ou l’immobilier.

D’autre part, certains bailleurs internationaux, comme des agences de développement ou des ONG internationales, ont manifesté de l’intérêt pour la structuration de nouveaux fonds. Ils pourraient par exemple se porter garants des investissements.

Aussi bien les investisseurs libanais que les bailleurs internationaux sont conscients de l’importance du secteur, et du gâchis que ce serait d’abandonner un écosystème riche en innovation. Il faut tout faire pour que les start-up puissent garder une partie de leurs services et équipes au Liban.

Dans l’immédiat, quelles sont les solutions que vous préconisez pour limiter les effets de la crise ?

Il existe une série de mesures à prendre. Pour contourner les restrictions sur le dollar par exemple, l’ouverture d’un compte en banque à l’étranger est une priorité, c’est un service que proposent déjà plusieurs banques aux entreprises libanaises, notamment à Chypre ou à Dubaï. C’est absolument nécessaire pour pouvoir être payé par la clientèle résidant hors du Liban et régler les fournisseurs à l’étranger.

Viser les marchés internationaux est aussi un moyen d’obtenir des liquidités en devises. Le marché local était de toute façon limité, avec une croissance annuelle de l’ordre 1,5 % ces huit dernières années, et il est aujourd’hui en pleine récession. Cela peut être fait soit à travers un distributeur, une franchise, une joint-venture ou encore la création d’une succursale.

Il faut par ailleurs réussir à compresser les dépenses, en convertissant par exemple une partie des coûts fixes (salaires, loyer) en coûts variables en fonction du chiffre d’affaires ou en remplaçant autant que possible les produits importés par des produits locaux.

Enfin, pour inciter les talents à rester malgré la crise, il est par exemple possible de convertir une partie de leur salaire en actions fantômes, permettant aux employés de profiter de l’appréciation de la valeur de l’entreprise sans effectuer de transfert de propriété. C’est un moyen idéal pour retenir les employés et les impliquer dans la création de valeur.

L’important c’est d’avoir une gouvernance transparente et d’établir un plan de communication claire sur la gestion de crise. Aussi difficile qu’elle puisse être, une crise est l’occasion de se réinventer en tant qu’entrepreneur.

Quelles sont les start-up les mieux équipées pour faire face à la situation ?

Les start-up, qui emploient une main-d’œuvre locale, produisent au Liban tout en exportant leurs biens ou services, sont dans une situation plutôt avantageuse, puisqu’elles bénéficient de la dépréciation de la livre face au dollar. Et le Liban n’en manque pas : parmi les jeunes pousses financées à travers les différents fonds et accélérateurs, certaines réalisent plus de 95 % du chiffre d’affaires à l’étranger.

Celles qui travaillent dans des secteurs plus innovateurs que d’autres, comme la fintech, l’agritech et la cleantech, sont également mieux placées. Enfin, dans un contexte de crise, les bailleurs regardent de près l’impact social des start-up.

Mais si certaines start-up arrivent à s’en sortir, ce n’est pas le cas pour toutes. Celles qui importent pour vendre sur le marché local sont touchées de plein fouet par la dépréciation de la monnaie et n’ont plus de marge de manœuvre. Certaines d’entre elles ont déjà dû mettre la clé sous la porte.

Quel avenir pour le secteur ?

Je suis convaincu que les start-up ont un rôle primordial à jouer dans l’économie, aujourd’hui comme demain. La technologie est un secteur économique indispensable, c’est un catalyseur de changement qui pousse l’innovation dans tous les secteurs, c’est elle qui nous permet d’avoir une vraie valeur ajoutée dans nos produits.

Je reste donc optimiste quant à l’avenir de l’écosystème. Nous avons les talents qu’il faut. Nous sommes au cœur de la crise, mais nous ne sommes pas le premier pays de la région à être passé par là. La crise finira par passer, il faut se préparer pour la suite.

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Crisis Management: 10 Simple Steps for All Entrepreneurs

CsT0uch12 — Wed, 11 Sep 2019 05:50:50 +0000

Crisis Management: 10 Simple Steps for All Entrepreneurs

In times of crisis, ventures face several important challenges including the loss of customers and suppliers, the failure to get additional debt capacity, the inability to develop reliable cash-flow forecasts, the departure of top talents, the obsolescence of current business models, the increasing cost of loans and the steady increase in the level of receivables and inventories resulting in a severe drop in revenue, profitability and value creation.

It is critical for founders of Micro, Small and Medium-Sized Enterprises (MSMEs) in Lebanon to work closely with their leadership teams and advisors to develop, communicate and execute a clear plan that addresses the different dimensions on how a crisis will impact their employees, shareholders, customers, suppliers and the community.

Crisis Management Planning

Proper crisis planning is the foundation for sustainable value-creation during turbulent times like the ones that we have been exposed to over the past weeks in our country. MSMEs in Lebanon are particularly vulnerable to extended periods of crisis as the local banks have stopped extending loan facilities to most of them over the past several months in their drive to deleverage their balance sheets and improve their Capital Adequacy Ratios.

MSMEs face also other tough challenges including access to sound advisory and mentoring services, access to top talents and access to new markets. Around 97% (or 40,000 companies) of local Lebanese businesses are MSMEs and they are the pillar of the Lebanese economy as they provide job opportunities for more than 50% of employees in the private sector.

Crisis Management Steps

We advise every Lebanese MSME to integrate the following ten crisis management steps in effectively leading their companies through turbulent times. These simple steps are applicable to most MSMEs regardless of their size, field of activities and level of maturity.

1. Identify the key risk areas

It is important to identify, map and prioritize the key risk areas that your company is facing during crisis. This gap assessment exercise should be completed with several stakeholders including your leadership team, your shareholders and your advisors. The risk prioritization exercise will consider both the level of impact for each risk factor and the probability of the risk event taking place. The focus will be on the high impact and high probability risk areas.

2. Develop a clear and concise crisis plan

The Crisis Plan will build on your risk assessment framework and will include SMART objectives and actions. The plan will also map your key stakeholders (by levels of impact and influence), understand their needs and identify the best ways to address these needs. The stakeholders will include the staff, the shareholders, the suppliers, the customers, the public, the government and the media. The Crisis Plan needs to focus on the very short-term actions as we are in a survival mode.

3. Be transparent and available

The best way to stop the FUD (Fear, Uncertainty and Doubt) rumors to spread in your company is to be as transparent and available as possible with your key stakeholders, namely your staff, your customers, your suppliers and your shareholders. This open and direct attitude should be consistent and on-going across all channels from group meetings, social media, one-on-one discussions, and announcements.

4. Manage your cash-flow with all your passion

Your MSME will live or die depending on the quality of your cash-flow forecasts and your corrective actions to address the obvious funding gaps that will accelerate during moments of crisis. Special attention should be paid to negotiating better payment terms with your suppliers, encouraging your customers to pay you earlier (through prompt payment discounts), keeping your inventory levels to a minimum and optimizing your expense structure. You should also reach out to your external investors (banks and financial services companies) and your shareholders to identify the most effective ways to address future cash-flow gaps.

5. Bootstrap as a state of mind and re-invent your business model

You need to review and optimize your cost structure and take all the necessary measures to align your expense forecasts with your revenue projections. Typical actions will include delaying all non-critical hires, stopping all non-sales related expenses, reviewing your in-sourcing and out-sourcing balance, letting go of your non-performers (bottom 5% of your workforce), taking a salary cut or restructuring the payment of salaries over the next 6 to 12 months when the crisis will be over.

You can also consider shifting part of your cost structure from fixed to variable through to deployment of performance-based bonuses or commissions while reducing your level of fixed costs.

Crisis times are the best moments to re-assess and re-invent your business model while taking appropriate actions such as focusing on a digital model vs. more feet on the streets. Spend time with your team and advisors to reflect on your current business model, decide on the core vs. non-core activities and agree on the key pillars for transforming and re-inventing your company.

6. Diversify your customer base and discuss with your competitors.

The 2006 crisis in Lebanon was the best catalyst to force many Lebanese MSMEs to open branches across the MENA region resulting in a reduction of their concentration risk in the country and the development of new markets.

Product and Market Diversification is an effective way to reduce the impact of the crisis on your MSME. It is recommended to list all the growth opportunities available and prioritize them through screening factors such as the level of investment needed, the related financial returns, the strategic alignment with your existing business, the easy of execution and the level of synergies that can be generated. This is an important exercise that should be implemented in collaboration with the team, the board and selected advisors.

These turbulent times are also ideal to reach out to competitors and explore the possibilities of developing alliances and partnerships while identifying acquisition opportunities as company valuations can prove very attractive in situations of crisis.

7. Have your contingency plan ready

Develop different scenarios (conservative, realistic and aggressive) on the possible outcomes of the crisis and identify the actions that need to be implemented for each of those scenarios with clear ownership and timing. You need to have the courage to take tough decisions during crisis so as the ensure the long-term survival of the company and the quality of the partnerships with your key stakeholders.

8. Reach out to experts and advisors

It is important during crisis to select a limited number of trusted, creative and competent people who will provide you with different perspectives on how best to prioritize and address your most critical risk areas. Regular interaction with those experts will help you find the most suitable solutions for the challenges that you are facing. We have a large portfolio of experts who have a track record in crisis management. These experts include lawyers, investment advisors, financial planners, coaches in risk management and mentors.

9. Communicate, communicate and communicate

Use all means possible to issue clear statements, update action plans, recognize top contributors, celebrate success stories and share new developments. It is also important to actively listen to your stakeholders’ main concerns (especially your staff and your customers) as it is one of the most effective ways to build trust. Effective communication to all your stakeholders as often, as clear and as consistent as possible, is one of your best success factors in turbulent times.

10. Strengthen your company culture through your positive outlook

Always maintain a positive, can-do attitude during moments of crisis as all your stakeholders will be looking at you as a role model and judge you on how best you live the company’s values during this transition period. Passion and faith are contagious so make sure that you have plenty of it to share. Create a commando spirit, share quick wins and don’t hesitate to reach out to your team members for special help and support.

Resilience and Flexibility

The above crisis management strategies are simple and clear, yet they provide an effective foundation to navigating your company through dynamic times of any sort.

A crisis that is poorly managed can destroy years of consistent value creation in a few weeks. A well planned, well communicated and well executed crisis management framework will validate that your company has solid foundations in place to address most of the challenges and risk factors that may develop in the future.

Make sure that you adapt your crisis management framework to the evolution of the situation as the goal posts will move continuously. Resilience and flexibility are the mothers of all virtues during turbulent times.

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Strengthening the Governance of Family Businesses in Lebanon & the MENA Region

CsT0uch12 — Fri, 09 Aug 2019 05:53:08 +0000

Strengthening the Governance of Family Businesses in Lebanon & the MENA Region

Governance Challenges

Family owned businesses (FOBs) are critical engines of social and economic development in Lebanon and the MENA region. They account for more than 95% of all registered Micro, Small and Medium-Sized Enterprises (MSMEs) in the country and the region. The fact that only 5% of them survive the transition from the second to the third generation is a critical concern. The root cause of many of these FOBs failures can be traced back to ineffective governance.

While governance covers a broad remit, the central role of the Board will be our focus. Boards in Lebanon and the region face five typical challenges that limit their ability to ensure trans-generational survival.

CSTouch Advisors are well positioned to offer board advisory services to FOBs in Lebanon and help them strengthen their governance foundation and develop an appropriate action plan to address the challenges below.

Challenge #1: The Board Role – Family First or Business First?

Many FOB Boards have informally evolved over time as their businesses have scaled and as younger family members have grown to take on leadership positions. Often there is no formal communication on the charter of the board nor any structured training for what the individual Directors role and responsibilities are.

To further complicate matters, FOB Boards are faced by a unique challenge: whether to put family first or the business first. What happens when, for example, the family wants bigger dividends, but the business needs greater funding for operations and growth? How does the Board respond to conflicts of interest if a family member starts a competing business for example? Historically, clarity on the Boards role, responsibilities and accountabilities were not necessary as the Board had time to be all things to all stakeholders.

However, as the complexity of business operations has grown – both in terms of industry participation, geographic footprint and competitive dynamics – and as the expectations of a growing family has also increased, there is no way for an FOB Board to be effective without the clarity of purpose and the focus of objectives. To address these complexities, FOBs are increasingly segregating family governance from business governance.

Critical Actions

Deploy segregated, but aligned, family and corporate governance structures
Draft and socialize the Board mandate
Detail and align on Directors roles and responsibilities
Provide structured and formal training for Board and individual directors

Challenge #2: Incorrect Board Composition

Many FOB Boards are comprised solely of family members who have grown up within – and along with – their businesses. As their businesses have enjoyed success, they have taken on greater leadership positions culminating in a role on the Board. While this not only ensures a trusted individual with a vested interest in the long-term success of the business, it also provides someone with a proven and intimate operational knowledge.

An additional complication for FOBs is handling the transition from a family-only board to one that includes independent Directors. Ensuring the exiting family Directors have an alternative role – such as a Director on the Investment or HR committee or on a family entity such as the Family foundation – is critical for maintaining commitment and family unity.

Critical Actions

Define the required Board composition based on foreseeable business challenges
Determine need and timeline for independent Board members
Define selection criteria and process for family appointees to Board
Define selection criteria and process for independent appointees to Board
Find new roles for exiting Board members to retain motivation and family unity

Challenge #3: Ineffective Board Dynamics

A Board has limited time to get behind the financials and truly understand the critical drivers of business value and to effectively challenge management in order to make insightful and impactful decisions. This requires each Board member to play their role and bring their specific attributes to drive a productive dialogue. Ineffective Board dynamics – both between Board members and between the Board and management – severely limit value add impact. Poor Board dynamics in regional FOBs typically stem from common behaviors:

A lack of trust based on poor transparency, past failures or lack of accountability, resulting in aggressive dialogue with management rather than insightful challenge
cultural norms of avoiding potential conflict, especially within the family hierarchy
Weakened commitment as real discussions held in privacy of majlis and only rubber stamped at Board or due to a disconnect between family values and business practices
An abdication of accountability because the Chairman doesn’t enable or encourage effective dialogue

Effective Board dynamics are critical – as with any team, the better its participants work together and are able to leverage their specific skills and experiences, the better the impact on business outcomes. It is the Chairman’s responsibility to ensure authentic and constructive debate that ensures clarity, accountability and, ultimately, results.

Key Actions

Align Board objectives and behaviors with Family values and expectations
Establish formalized Director onboarding program
Ensure Board development has regular slot on Board agenda
Institute annual independent and peer assessment of Board performance

Challenge #4: Lack of Preparation

The responsibility for productive Board meetings lies with the Chairman whose primary function is to ensure the right agenda is set, dialogue in the Board is focused, rigorous and constructive, and accountability for action is established. However, this relies on Board members ensuring they are up-to-date on the agenda topics and on management to provide insight and transparency. If a common fact base of issues is understood prior to the meeting, Board time can be more effectively spent on assessing options and aligning with management on the optimal way forward. Without this understanding, Board time will, at best, be wasted on bringing Directors up to the same level or, at worst, end with frustrating indecision that delays progress and action.

With Board meeting dates for the year usually scheduled in advance, Directors should easily be able to set aside regular blocks of time to review materials, prepare questions and submit requests for additional information or clarifications. This should really be the base expectation of any credible Director whether they are family members or independent.

Key Actions

Set annual Board dates and communicate agenda focus for each session
Send Board papers 7-10 working days in advance
Evaluate Board reporting packs for transparency and insight
Utilize tools such as BoardPad for electronic store of latest reports and offline voting

Challenge #5: Reluctance to Make Difficult Decisions

Decision-making in regional FOBs can be very complex. The benefits of the FOB model – a patient long-term approach to the deployment of capital together with an entrepreneurial mindset – drives a different decision-making approach to a Board driven by a short-term focus on quarterly earnings. This approach has resulted in decisions to enter new industries or geographies driven as much by family reasons as commercial. A new business can be born from the passion of one of the family members and, if they are able to convince the patriarch, the new venture can easily raise funding. As the rationale to enter a new sector is often not wholly commercial, the decision for FOBs to exit out of businesses – many of which may have the emotional attachment of been started by parents or even grand-parents – is also not just driven by numbers. Consequently, an FOB can carry loss making entities for years and years. Every Board the hockey stick turnaround (a short period of continuing decline followed by a sudden and prolonged upturn in performance) is promised and unfortunately almost every subsequent Board the hockey stick is revised further out.

An effective Board will not hesitate to make dispassionate decisions driven by cold hard facts. Family harmony and unity is not best served by turning a blind eye to underperformance of assets with emotional attachment. It is best served by maintaining a healthy portfolio of cash generating businesses that will serve the social and economic needs of family members. By taking a strategic view, the Board can maximize shareholder value by addressing assets before they enter the Business Model.

Key Actions

Implement a commonly understood performance management model (as above)
Conduct detailed portfolio review every two to three years
Supplement portfolio review with annual refresh of key assumptions
Establish Corporate Development function to execute for portfolio decisions

Challenge #6: Inadequate Follow Up

A common complaint of FOB Boards is the lack of certainty that decisions made at the Board will flow though to management actions in day to day operations. Board frustration is palpable when management does not reflect the urgency or priority the Board expects. Even with the best will in the world, the Board cannot be everywhere and know everything that is happening in its businesses. Equally, the company secretary is often nothing more than a note taker who checks-in just before Board papers are due for an update that it cut-and-pasted into the pack.

This can lead to a breakdown in trust which is only compounded by micro-management that only creates a burdensome bottleneck that chokes decision making and paralyzes the businesses. Establishing a clear hierarchy of support structures under the Board is essential for driving follow through and execution. The Board must provide clear direction and oversight but must also give accountability to the relevant support structure.

Key Actions

Institute functional committees to develop detailed recommendations for the Board
Deploy industry specialist committees to provide sector insight and validation
Establish controlled delegation of authority to support committees (i.e. ExCom)
Employ full-time company secretary to proactively follow up on Board actions

Conclusion

All Family-Owned Businesses harbor the dream of translating the success of the patriarch into a truly sustainable trans-generational business. The benefits of the FOB model – an entrepreneurial mindset coupled with a patient approach to deploying capital – can only become sustainable by ensuring the appropriate discipline and governance is instituted. As the Board has a central role to play in this, it must dispatch the typical challenges that create inertia and friction in the execution of its objective: facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.

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7 Tips for Your Investment Readiness and Valuation

CsT0uch12 — Fri, 12 Jul 2019 05:55:10 +0000

7 Tips for Your Investment Readiness and Valuation

Constantin Salameh – Senior Coach and Investment Advisor, shares the key learnings on investment readiness and valuation.

1. The fundraising and valuation process is always longer than what is planned initially.

People expect the fundraising process to be closed in three months while the most likely scenario is 6 to 12 months. This means that the company needs to bootstrap for at least a period of 6 to 9 months to be able to go through the phase and prepare themselves for the funding round. Bootstrapping – building your company without outside investment money, becomes an essential dimension in the art of survival in a difficult environment.

2. Nobody will believe your financial forecasts unless these forecasts are validated.

The financial forecasts are validated through either customer focus groups, market surveys, one-on-one interviews and ideally, with a letter of intent or with potential orders that will be placed in the near future. So, it is critical is to get the validation of your forecasts as they will prove to be an important factor in the valuation of your company. The stronger is the market validation of your forecasts, the higher will be your company valuation.

3. You need to plan for several funding rounds.

The most likely situation is that your company will go through 3 to 4 funding rounds with each round bringing a potential dilution for existing shareholders including the founder(s). Hence, it is highly recommended to plan for the future funding rounds today and protect the interests and motivation of the founders so that they will not find themselves with a very small percentage of the equity capital of the company following 3 or 4 funding rounds. This dilution process will also impact the valuation of the company today and in future rounds in an effort to keep the founders highly motivated.

4. You need to always have the right financial advisor working with you and your team.

Valuing a company, deciding on the funding gap, selecting the right investor, negotiating a win-win term sheet and finalizing the shareholders agreement, are time-consuming and complex tasks that will require you to have the right financial advisor with you all along the journey.

We’re here to help you in this investment readiness journey with our business and financial advisors and solid track record in assisting companies raise grants, debt and equity capital over the past years.

5. You need to be open to release sweat equity.

Sweat equity is a form of equity that you may provide to entities or to individuals who you believe will provide substantial value in the transformation of your company, but you don’t have the cash to pay for. Hence, you release a small amount of “sweat” equity (typically 1% to 3%) to cover their services. These services could be in accessing funds, accessing new markets, accessing innovative technology or accessing top talents.

6. You need to launch the right advisory board.

Identify your main pain points and major challenges that you are facing and then look for experienced professionals who are best positioned to address these pain points and challenges. They will become members of your advisory board and work with you and your team in scaling and creating value to your stakeholders. We can also help you access the right members of your advisory board as we are working with dozens of coaches, advisors and mentors across several functions and several sectors.

7. You live and die by the quality of your cashflow forecasts.

Make sure that you understand how to put a cashflow forecast together and understand the key assumptions, make sure that you monitor it on an ongoing basis, make sure that you know what are your future cash gaps, and make sure that you are clear about the most effective ways to be able to fund these gaps. Very few companies master the discipline of proper cash-flow forecasting and management.

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12Ms for Investment Readiness for MSMES

CsT0uch12 — Thu, 07 Mar 2019 05:54:08 +0000

12Ms for Investment Readiness for MSMES

Around 97% (or 40,000 companies) of local Lebanese businesses are Micro (less than 10 staff), Small (less than 50 staff) or Medium-Sized (less than 100 staff) Enterprises (MSMEs). These companies are the pillar of the Lebanese economy as they provide job opportunities for more than 50% of employees in the private sector.

Several challenges are facing MSMEs in the region including access to funding, access to markets, access to talents, access to technology and innovation, access to transparent regulation, access to better facilities and infrastructure and access to sound advisory and coaching/mentoring services.

The most critical challenge by far is access to funding sources (grants, debt, semi equity and equity) as only 2% of the total bank loans goes to MSMEs in the region and more than 70% of the MSMEs have a tough time becoming bankable and obtaining badly needed funding sources.

As thousands of MSMEs are in the process of raising debt and/or equity capital with Business Angels, Venture Capital/Private Equity funds, banks and the pool of 3Fs (Family, Friends and … Fools), one question keeps coming up again and again….

What are the foundation blocks for becoming investment-ready to face potential investors and convince them to fund my venture?

Having advised dozens of companies in their transformation and fundraising journeys over the past 30 years, I [Constantin Salemeh] have compiled a list of the following 12Ms to help answer the investment readiness question. Feel free to get back to me in case you would like to validate your venture’s 12Ms and fine-tune them to the audience of investors that you are targeting. The better prepared you are, the more effective you will be in convincing potential investment partners to join you as shareholders and accelerate your value-creation potential.

12Ms to help answer the investment readiness question

1. M for a clear, comprehensive and shared Mission

Why do you exist, who are your customers, what benefits are your products or solutions bringing in addressing the existing pain points of your clients? Your Mission statement should be concise and impactful creating an emotional link with your stakeholders (shareholders, employees, customers, suppliers and partners).

2. M for a complete and competent Management team

This dimension is a critical one as most investors invest in people first and want to make sure that the management team can execute on their value creation plan. You need to make sure that you have a complete and diversified team with cross-functional expertise (technology, finance, sales, operations and marketing) who can work together and overcome the many challenges of the transformation journey ahead. In case your management team is still not complete, it is recommended that you surround yourself with an advisory board with expertise related to your main pain points (validation of your MVP, scaling your venture geographically, raising equity capital, strengthening your brand equity or hiring and retaining top talents).

3. M for a proven business Model with a track record of value creation

Your business model describes how you deliver your products/solutions to your target markets in a cost-efficient way while addressing the needs of your clients with a clear advantage compared to your key competitors. How scalable is your business model and what are the possible bottlenecks for consistent scalability?

4. M for an attractive Market with a strong profitable revenue growth potential

How large is your market, what are the barriers to market entry, how fast is your market growing, how do you segment your market and select your target segments? What are the profit margins (gross profit and operating profit) that you can generate in your target markets and sustain them over the next few years?

5. M for a differentiated Mantra and customer value proposition

This is another critical dimension as investors are always looking for innovative or disruptive products with a clear competitive differentiator. What make your products or solutions unique and how can you sustain these competitive differentiators over time. The clearer is your Mantra, the stronger are your chances of attracting investors.

6. M for realistic and timely Metrics

It is important for your venture to be accountable for a selected number of clear Key Performance Indicators or KPIs (revenue and profit levels, number of new customers, Net Promoter Score, reject rate and renewal/closure rate) that best describe the state of your business. These metrics need to be agreed and reviewed with your investors and reflect the measures of your venture’s most important processes. You need to make sure that the metrics are realistic and can be tracked in an automated way minimizing potential bottlenecks in gathering them.

7. M for SMART Milestones

Another important foundation for your venture’s investment readiness is your ability to define and execute on Key Strategic Initiatives (KSIs) or Milestones that will help you deliver on the above KPIs or Metrics. These Milestones need to be SMART (Specific, Measurable, Attainable, Relevant and Time-bound) and owned by most of your team members to ensure alignment.

8. M for regular Monitoring

The above Metrics and SMART Milestones must be reviewed on a regular basis (either monthly or quarterly) to ensure that there is a clear level of accountability and effective execution on the agreed plan. Failure to review the KPIs and KSIs on a regular basis will send the wrong signals to potential investors in terms of poor follow-up and half-baked execution.

9. M for intelligent Money to fund transformation

As you raise money (either debt or equity), you need to screen your investors and focus on the ones who have a real value-added (intelligent Money) to help you address your key challenges or pain points. These challenges include opening doors, helping expand geographically, sector expertise, functional expertise (technology, sales, finance, operations and human resources) and access to funding. It is preferable to select an investor that offers you a lower valuation but that can provide you with an accelerated transformation through innovative value-added services, instead of a passive investor with a higher valuation but with no strategic contributions.

10. M for comprehensive risk register and Mitigation plan

Founders of ventures often forget to build a repertoire of the key risk areas that might impact their ability to execute on their transformation plan. It is always important to list these risks, prioritize them and develop an effective mitigation plan for the high impact risk categories with a high probability of happening.

11. M for emotional Maturity and succession planning

Few founders have the emotional maturity to accept and embrace mentoring and coaching services from new investors as they believe that they are on top of most challenges faced by their ventures. In addition, a handful of founders will realize that their company might be better off with another CEO at the helm and embrace a succession planning process.

12. M for contagious Motivation and passion

A final dimension that influences investors is the level of passion and motivation that permeates from the founder, the leadership team and the entire staff. There is no better foundation block for investment readiness than having a motivated team, speaking of ONE VOICE, heading in ONE DIRECTION and acting as ONE team.

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