???????? Hi friends!

There is something very odd about sitting in a park on a Saturday afternoon in September in the UK and having to find the shade because it is just. that. hot.

I’m now praying for a time when I don’t have to start off these newsletters with a nod to the weather (though no doubt I’ll just complain about how cold it is instead).

In this weeks Off Balance, I’ll be chatting about:

???? The UK’s return to the Horizon programme.
???? How to transition your career into startups.
???????? Term Sheets and Control.

Also if you have any feedback or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

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Now let’s get into it.

Broaden Your Horizons

Anyone that knows anything about me will know I am no fan of the UK’s decision to leave the EU. After all, I studied languages at university and my wife is Italian.

And sometimes the stupidity of the whole thing – at least in my opinion – is brought into sharp relief when we find ourselves celebrating winning back something we should never have lost in the first place.

A case in point is the UK’s return to membership of the Horizon programme.

The country’s scientific community has been in limbo for the last few years as they remained frozen out of the programme as a result of wrangling over Brexit between the UK and EU.

Some scientists have complained that the hiatus has led to damage to relationships, losses in funding and the ability to collaborate with the scientific community on the continent in the same way.

As scientific progress is very much an ‘on the shoulders of giants’ endeavour whereby advancement is often as a result of building on the research of other scientists in the same field, being locked out of such an important programme has definitely hindered researchers here in the UK.

But as universities start priming researchers to apply for grant funding, in this particular case it seems that the pragmatism has overruled emotion and a rational approach has prevailed.

You may be asking yourself why I’m even covering this here – it doesn’t feel like that much of a startup issue, right?

Well the reality is that we often only think about startups from the perspective of software businesses that don’t seem to have that much science behind them.

But there are a large number of deeptech ventures that not only may have been born out of large research projects, but continue to be dependent on them to push the envelope even further.

These may be businesses in fields as diverse as biotechs, quantum computing, spacetech or AI. So it is essential for those companies to have access to the latest research – and researchers – in these various fields.

According to the Russel Group, 2,000 UK businesses participated in Horizon 2020 and secured awards of 1.4bn Euro. 60% of the businesses were SMEs and received 840m Euro of that total funding.

This is a win for the startup ecosystem here in the UK, it’s just a shame that we needlessly lost a couple of years of progress in the process.

How can did I add value?

One of the questions I’m frequently asked is how to break into startups.

Whilst ordinarily this sort of a question may come from someone at the start of their career, I occasionally get asked the same thing by someone who is quite progressed along their career path.

And when this is the case, they are often trying to make the transition from a large corporate and find it difficult to understand why their credentials aren’t having the traction they would expect them to have.

I had one such conversation with a switched on finance director at a well known listed company in the finance space recently. A lot of our discussion is pretty applicable to anyone coming out of a corporate who’s looking to move into startups.

Here are some of the questions I’d pose and some of the pointers I’d give:

Why do you want to work with startups at all?
Let’s face it, they don’t have much money, they are notoriously chaotic and lack structure.

Pretty much the opposite of working with a larger corporate or multinational.

Here are some of the best reasons you might want to consider taking the leap into an early stage business:

Your a generalist and want to have more diversity in your role.

You are considering launching your own business and want to get some experience.

You want to learn new skill sets on the fly.

You’re interested in technology and innovation and want to be part of that ecosystem.

The wrong reasons are money or ‘glory’ – the chances of you picking a startup that is going to ‘make it’ are pretty low.

You may end up kicking yourself and asking why you ever made that jump when your last month’s salary doesn’t get paid after taking a 30% drop in salary to join in the first place.

You may have been top dog before, but in a startup, you know nothing.
I have seen a lot of founders make the mistake of bringing in someone with a corporate background only to find that they are unproductive or completely out of their depth.

Startups are built with scarce resources. The likelihood is that in a corporate, you will have been a cog in a rather large machine.

This means that there will have been a whole infrastructure around you that will have carried a lot of the load, probably without you even realising.

But in a startup, you’re having to do everything from start to finish. And there is not an insignificant chance that someone that is – in theory at least – way more junior than you and has much more experience of the multitude of processes you’re now faced with.

You have to actively unlearn a lot of the stuff you would have picked up in corporate life.

There is no-one else to cover your backside, no machine to fall back on, no team that masks some of your knowledge gaps.

It’s just you… naked and alone.

(OK maybe not quite naked or alone, but you get my drift).

How do you find a startup to work with?
I remember a graduate asking me how to know if you’d chosen the right startup to work with, i.e. whether you’ve picked the next unicorn.

The simple answer?

You don’t.

So actually, if you are looking to get started working with early stage businesses, you may as well pick any.

But here are some good places to look:

Otta

Work In Startups

UK Startup Jobs

LinkedIn

Wellfound

AngelList

Y Combinator

Founders Factory

Or, and this is my favourite, look for companies you’d really like to work for and find a connection of a connection to give you a warm intro. Either that or just cold email the founder and explain why you’d like to work with them and what value you could add.

Similarly, you can look at VC fund websites to see if they have portfolio companies that are recruiting, or just reach out to people who might be willing to have a coffee and put in a good word.

The reality is that a bit of hustle, especially when you know that you don’t have the sort of experience that is going to make you a shoe in for your ideal role.

What sort of role should I look for?
Frankly whichever makes most sense for you and the startup. If you have a finance background it might be a Head of Finance, or Controller. If it’s marketing it might be Associate or Head of Content.

The point is that you shouldn’t be too picky over title or even scope of the role.

Just get in and get your hands dirty.

That way you start building up experience, whether that’s in finance, ops, marketing or something else altogether like product.

The great thing about startups is that, unlike with corporates, people move on regularly and often. There is no stigma attached to being in a role for a year or two and then jumping to the next opportunity.

Startups don’t attract ‘lifers’ because as they grow, the roles and needs morph quickly. The manager you hired yesterday, may not be the leader you need tomorrow.

One thing that you have to get comfortable with is that, until you have built up your credentials, you may need to come in at a slightly more junior level than you expect in order that you can gain the knowledge and experience that you need to navigate early stage businesses.

Be prepared to get bitten by the bug.
It is very rare that I see someone go from startups back into a corporate role.

Most people when given the opportunity to explore the phase space of their skills and areas of interest are loathe to return to ‘nine to five’ in the traditional sense.

But it is worth remembering that startups aren’t for everyone.

If you are someone that likes process, likes routine, likes stability, likes structure and needs a team around them to shine, you may not love working in a startup.

And that’s also ok.

I know that, conversely, I would be absolutely AWFUL working for a corporate having spent close to a decade with early stage businesses and two decades with entrepreneurial ones.

I love the autonomy, the ability to explore new ideas, new technologies and be able to solve different problems on a daily basis. I also am not great with authority ???? so would struggle in a slow, bureaucratic organisation.

What about you? Have you made the transition from corporate into a startup – how did you find the move?

Off Balance

Last week we went through the Economic terms in the Term Sheet, and this week we’re going to cover the critical aspect of Control.

Unfortunately a lot of founders – especially first time founders – focus almost solely on the economics and end up in strife because of elements of control that they had not paid enough attention to.

Fear not though, I’ve got you covered ????????

So let’s dive straight in to some of the key terms you’re likely to come across when you’re fundraising and what you might want to look out for.

Term Sheets – Control

The Exclusivity Clause. 
We discussed this in last week’s edition, whilst conducting diligence. This may be used to delay investment from other parties – term sheets don’t guarantee investment.

But it is an immediate way to exert control over the relationship as it shows that the VC wants to signal their importance.

There is nothing intrinsically wrong with a VC asking for exclusivity, especially if they have already invested a great amount of time into the deal.

But it is always worth noting that exclusivity ties your hands.

If the deal falls through you’ll have lost a month, maybe more and may struggle to find an investor that’s able to replace the last one.

Ownership Stake.
Beware early stage investors taking large chunks of the business – you really need to understand valuation and dilution.

I’ve seen agencies involved in building the first iteration of the product take a huge chunk of the cap table, whilst also writing in claims on future equity. Not only does this mean they have a seat at the table long after they have stopped working with you, but it’ll probably make it less palatable for future investors.

It’s also more common in venture studios, university spin outs or some of the less well known accelerators – most ‘proper’ VCs won’t want a controlling stake in the venture, that would be too much hassle and is not how VCs operate.

Voting Rights.
It is possible to change the structure of voting rights, so an investor has more voting rights than their percentage shareholding.

Of course, this works the other way with founders having dual class shares or enhanced voting rights.

Don’t make the assumption that percentage ownership is always equivalent to voting rights, make sure you understand what it means if the term sheet includes any clauses related to this.

Board Seats.
VC investors at seed + will probably want a board seat. This is not necessarily a bad thing, but remember it’s an individual joining albeit on behalf of their firm.

Do your DD: Do they add value? How are they to work with? Do they actually have experience working on a board?

If it’s a small cheque, they may request observer rights rather than full board seats. This means that they won’t have voting rights on the board, but their presence can still influence outcomes.

I’ve also seen boards where the observers are a lot of work. They were often unprepared and in some cases didn’t really have much experience on the governance side of things.

Shareholder Consents.
It is quite normal for investors to ask for shareholder consents or protective provisions – aka “you can’t do this without our express agreement”.

This does not necessarily have to be proportionate to shareholding (though it can be), it may just be that your lead investor demands that all significant changes to the business have to be approved by them. This can include things like:

Executive remuneration

Hiring of senior staff

Increasing the share capital (fundraising)

Taking on debt

Entering into one or a series of contracts above a certain value

Changes to the articles or shareholders’ agreement

Changes to the business plan

Engaging in M&A activities

Given how far ranging some of these are and the sort of implications they have on a startup that needs to remain agile, you want to ensure that your investor(s) have the knowledge, skills and bandwidth to make these sorts of decisions.

Reverse Vesting.
You founded the business, right? So your shares are yours, right?

Wrong.

Welcome to reverse vesting.

Essentially this is similar to options vesting whereby your shares vest over time or based on certain milestones.

Now, there are some legitimate reasons an investor may ask for reverse vesting, the main one being that they would like to ensure founders remain committed to the business post investment.

But obviously, as a founder, having built things up – maybe without any investment – this can be a tough pill to swallow.

You may be able to negotiate some of the shares to vest up front based on the work you’ve already put in, or have them accelerate based on a milestone.

Redemption Rights, Right of First Refusal and Pay to Play.
Investors may sneak in a clause on redemption rights meaning the company may have to buy back their shares after a period.

This might be in order for investors to force a timeline on exit which might seem a long way off when you first take the investment, but can roll around sooner than you might imagine.

They may ask for right of first refusal if other shareholders try to sell their shares, allowing them to increase their stake (probably at a discount) should an existing investor want to take some of their cash off the table.

Later stage investors may also penalise earlier investors with clauses like Pay-to Play, where earlier investors are forced to participate in future rounds or lose out.

Most-Favoured Nations (MFN) Clause.
What about MFN I hear you ask?

MFN clauses allow investors to alter their terms to those of a more favourable set given to future investors.

This became pretty prominent in some of the Y Combinator financing instruments.

It essentially means that you might get diluted a great deal more than you were anticipating.

Conversion Rights.
Some investors have their cake and eat it.

They may have the right to convert preference shares to ordinaries or common stock affecting control.

This could be triggered during an exit event, if the liquidation preference is low or if during an IPO preference shares make the deal less attractive to public market investors.

Information Rights.
Information rights are a soft and valuable form of control.

Companies report performance on a regular basis ensuring that investors are kept appraised of progress against milestones.

This can be abused and I have seen instances where founders find themselves reporting constantly, purely to tick boxes rather than to receive any valuable input back.

If you have taken a lot of small cheques and not rolled them up via a syndicate, you may find that you are fielding questions from lots of minority shareholders that are a suck on your time with little value add to the business.

Management Rights.
Some funds in the US may demand management rights, allowing them to ‘actively’ manage the startup.

This is less prevalent in VC investments in general as it doesn’t suit the business model for most.

But there are some firms that do this as they believe they will have more success running the business than the founders.

Rights of Assignment.
Investors may include rights of assignment allowing them to transfer their shareholding and rights to another party.

Again, remember that you have taken investment based on assumptions of having a certain investor at the table based on their belief in your business’ ability to succeed.

What happens if that investor changes to someone that has less belief in what you’re building?

What does that mean for your business? And for you?

Tag Along and Drag Along.
Then we have the good ol’ tag and drag along rights.

These are clauses that force shareholders to act in concert.

So if some shareholders want to sell, it allows others to sell on the same terms.

Or equally, if some shareholders are selling, it forces others to sell as well.

This makes it harder for smaller shareholders to hold up a transaction if larger investors want it to go through.

Rights Over Future Cash Flows.
What about dividend rights?

These give investors explicit control over future profits – I’ve seen this and it’s messy.

Essentially you may end up having to accrue for dividends against profits that the business has not even printed yet (and by the way, this is not even allowable under UK companies law which requires dividends to be drawn from post tax profits).

Vibes.
And let’s not forget, there is a power dynamic at play. Even when control isn’t exerted, founders feel it.

So make sure you know what to look for and what to do if you see any of these terms crop up in your term sheet.

None of these topics are exhaustive, there are always new terms that might crop up from time to time.

And as markets become more wary, we’re likely to see more terms that seek to ensure that investors are protected against their investors going to zero.

So keep your wits about you and understand what is likely to allow your investors to exert more control over you than you’re really willing to take.

I hope you found this useful, as always, I”d love to get your feedback and understand the sort of topics you’d love to hear about.

Just hit reply to this mail or drop me a line at [email protected] and let me know ????

????And that’s a wrap for this edition of Off Balance – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish