Through Sean AdlerCEO of GZI and expert advisor to Founder Institute, GLG, Guidepoint and AlphaSights.
Your board of directors will likely veto this. It can also be a blessing in disguise if you’re lucky enough to sign competitive buy and sell contracts without needing permission to get companies aligned. Here’s how to combine competitive exclusivity clauses for your private business within the financial industry regulatory authority and SEC compliance.
1. Exclusivity clauses include both sides.
The federal government maintains a list of legal entities legally authorized to conduct securities transactions for private companies. Search for FINRA accredited funding portals and broker-dealers to access their databases on Broker Check. It’s all outreach from there.
FINRA buy-side termsheet regulations dictate that only one financing portal can list a company public call at any time. This is similar to buy-side term sheets from private investors who use a no-shop clause to ensure they close with a portfolio company. The difference is that most private equity or venture capital funds are not accredited at the federal level and often rely on investment banks to approve their exits or make their portfolio companies public.
Make sure to sign non-exclusive agreements on the buy side as much as possible, as their terms are only valid if the said term sheet is accepted.
Keep your business partners on both the buying and selling sides connected so they can work together for a positive sum game. This continuously empowers each respective partner your company signs up with.
2. Empower your crowdfunding investors and partners.
Crowdfunding comes close through the combined efforts of the platform’s internal network and the individual marketing efforts of a listed company.
Unlike traditional funds tied to LP agreements, crowdfunding investors can hedge risk in the same way as public markets and the participating individuals do not need ownership objectives to make the investment worthwhile as the platform is the entity that majority interest.
Duplicate buy and sell listings allow you to work directly with your crowdfunding investors and the institution approving the sale. Non-accredited investors were excluded from private equity and are still excluded from involvement on the sell side. The sell-side offering protects your crowdfunding investors, which was previously unheard of in private equity.
Look for crowdfunding portals that allow you to raise a prize round in common stock or simply by preference. This gives your company a legal valuation instead of a statement of value.
3. Generate flexible results.
Private equity outcomes are still considered binary. Most business owners understand how this affects operations as the dynamics focus on exits within a specific time frame. This is due to internal constraints that venture capitalists face within their fund’s usual 10-year shelf life. Changing the game from zero-sum to positive-sum by giving your partners a smaller percentage of the proceeds instead of larger outcomes gives companies the opportunity to both titrate upwards and make the classic valuation jumps that private companies are notorious for.
This reverses the dynamics of exit scenarios for private companies, as you can continuously list fundraisers as negotiations wrap up. This gives your business flexibility through the infrastructure of your business partners. Investment banks already work on both sides, so institutional investors won’t mind as much as individual investors because the institutional funds are likely signed up with the same investment banks as you.
Discuss these dynamics with your team to determine what kind of contracts are appropriate for your company’s goals. Harmonizing competitive exclusivity clauses can provide additional flexibility if your team agrees on the benefits.
4. Derisk operations for a positive sum game.
SEC-compliant valuations validate your company’s valuation in a way that most venture capital and private equity funds cannot, unless they have the FINRA accreditation held by corporate venture capital or private investment banks. The due diligence for SEC EDGAR is more strenuous than most private equity raises, as it requires background checks, claim forms, securities law compliance checks, and a CPA review or audit. This differs from the more loosely regulated internal document checks, CPA certifications or reviews, client and employee interviews, and legal meetings to finalize term sheets required by private equity investors. Passing SEC-compliant due diligence increases the credibility of your private company.
Apply the benefits of an SEC-compliant valuation to differentiate your business by highlighting the certification and registration of the claim at the federal level so the public can trust your business. The extra credibility benefits both the purchase and sale contracts.
Using competitive termsheets on the buy and sell sides shows demand for your startup and benefits both parties because supply is limited to one company on each side for the year.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.