How to deliver bad news to investors

Hey founders, today I’m going to address a crucial topic: When to update your investors with bad news. If you’re an entrepreneur and running a business, you will have to give bad news at some point.

There are many ways to give bad news. One of them is not to give any news at all, let everything go down, and then explain why you have only ruins and not a building on fire. This method isn’t recommended, but some people choose it – I don’t.

There are minor issues or bad news that can be managed in your monthly and quarterly updates. Like missing your quarterly numbers by 3-4%, or if you’re having a tough time recruiting people, or if a particular distributor who was contributing a large part of the business dropped you for reasons unknown or customer complaints. These are the kinds of things you can manage in your monthly and quarterly updates.

However, certain kinds of news shouldn’t be neglected. These should be communicated to the investors immediately. If a co-founder has left, or one of the co-founders has been diagnosed with severe disease and will not be available for the next 6-8 months, or your fundraising efforts are falling through, or a significant client that contributes a substantial chunk of the profit has left. These are the kinds of situations that need to be communicated to the investors immediately, preferably not on e-mail.

What I recommend is organizing a conference call or an in-person meeting. Explain what is going on to the investors face to face, in a way that is direct with no sugar coating. Be humble about the fact that things have gone wrong. Don’t try to play up things to avoid the investors being angry at you. If the situation is terrible, investors have a right to be irritated and will point out things that could have gone better. You should take criticism in your stride as you’re expected to execute successfully. Take responsibility, be direct, and you’ll find that investors will probably come back with solutions for you to manage the mess.

In adverse situations, you should have a turnaround plan. I would recommend having one if you’re going to have a face to face meeting. If you don’t have one, let the investors know and get back to them in a few days or a few weeks. There may be some questions the investors have, for which you may not have the answers. I would recommend not making up turnaround plans on the spot. If you don’t have the answers, tell them. Mention that you’re going to get back to them in 5, 7 or 10 days (or whatever number of days you believe you need) but ensure that you keep those promises.

Delivering bad news should not be difficult. It’s only tricky when you don’t want to give bad news, and you feel hiding is the best way forward. But it doesn’t solve anything. In fact, it only leads to the problem of getting bigger. If hypothetically, the company shuts down, and investors find out that you knew in advance, you could find yourself in a hot legal soup.

I’ll leave you with that, and I would love to know how some of you guys have shared bad news in the past. Also, if you have tips for other entrepreneurs, do share them in the comments.

Should VCs blindly be founder friendly?

Last night, I went for dinner with Mikhil where we got into the debate on whether VCs should be “founder friendly” or “venture friendly”. He was for the former and I the latter. I argued that at the end of the day, it is the combined responsibility of both the venture capitalist and the founders to ensure that their investors make money.

Then, this morning, Dr Malpani’s post added to that debate:

I believe that at the end of the day all stakeholders i.e. the founders, investors, employees, ESOP holders, customers, suppliers, vendors, etc. will do well only if the venture continues to grow and generate profits. Therefore, the primary dharma of all stakeholders should be to make sure that they do their part in growing the venture. It also means that sometimes investors are required to take actions that put the venture’s interest above that of the founder and therefore get termed as “founder unfriendly”.

Venture capital can be quite a tricky game to play…


Choose Your Termsheet Battles Carefully

Since there is a limit to the amount of negotiation that takes place on any deal, founders that intend on fighting to win every point of the battle will rarely ever win the war. Founders should enter negotiations for investment with a clear understanding that things are bound to change and that it is their duty to ensure that the people entering their company feel welcome as partners. When the welcome feels akin to pulling out teeth the signs are ominous.
As a founder, the next time you sit with a VC for an investment deal negotiation, ensure that the most important matters are on terms that you are comfortable with e.g. investment amount, valuation, reserved matters, board composition, liquidation preference, ROFR, anti-dilution, clawback, conditions for the second tranche, etc. These are points worth negotiating on.
Then there are also the terms that will raise a sceptre of suspicion that can be discussed with the investor but remain non-negotiable e.g. look-in of founders shares, vesting of founder shares, one vs two tranches, information rights, approval for major expenses, termination, fraud, etc. The harder you fight for altering or removing these clauses the bigger the ditch you are digging for yourself.
Therefore, I would like to offer you a peek into how I prepare for any negotiation with founders. I mentally create 3 lists of points: must-haves, should-haves, would-love-to-haves.  My priority is to ensure that I get all my must haves and in the absence of any, I am willing to walk away from the deal or concede points from my other two lists. This strategy works well as it allows for win-win conversations. Invariably, I have walked away from negotiations not only with my entire must-haves list and most of my should-haves but also, conceding points that were important to the other side as well. It is only when both parties walk away reasonably happy from a negotiation table that everyone knows that a good deal has been cracked!


Do our systems create rebels out of entrepreneurs?

Solve this… Person V does consulting for Person G. The deal is closed, Person G promises to pay Person V. Invoices are issued and Person G changes colour to stall paying out Person V.
Person V has invested months of personal time,  employee time, rent and other overheads to close this deal and it is one of the largest deals in its sector in India. 
Person V has waited to close this deal expand his team (unaware that Person G has other plans). Person V builds a framework to build on the success of this deal. A data mining platform is built which creates new opportunities at minimal costs. The newly hired team starts work and is successful to pay for itself and start repaying the money taken from investors. 
In between a large deal with Person K is done in which Person K pays 25% and then starts to make excuses to avoid payments. Infact the taxes collected by Person K are not paid for months which puts Person V in a position where he might have to cough up taxes that he hadn’t collected! The stalling of payments creates a cash outflow situation for Person V.
Now, the predicament our legal, tax, investment and family places on Person V.

  1. Tax department says pay service tax and income tax on revenues that were invoiced but not received. This will lead further cash outgo. 
  2. Investor says only book what is received, this leads to a book loss as the money that isn’t received so shouldn’t be booked.
  3. Legal says you should litigate for dues which is long tailed. Additionally to prove your case follow point 1.
  4. Family & Investors say your running a loss (on the books) so cut down or shut down. 
  5. How each faction interests is pitted against each other is quite visible.

Person V wants to get paid and is making all out efforts to own up to his responsibility, sending emails, messages, legal notices and even taking on political forces head on to get his dues. 
Meanwhile Person V is confident that the new business that has been built can repay the investors even if the money from Person K and G continues to be outstanding.
In this entire scenario the blame is on Person K and G for not paying on Person V but the entire system works in a manner that it blames Person V for actions of Persons K & G instead of getting Person V his dues. Family, Investors and Government don’t want to take responsibilities for getting Person V paid (so they all get paid) and will instead take the role of blaming the Person V for the actions Persons K & G.
Meanwhile Persons K & G are roaming around posting pictures on social media about how awesome their lives are.
What should Person V do?