Carve outs for management is a tool that is often overlooked by boards in angel-backed companies. It is a tool that can be a critical in making an acquisition occur, but is difficult to get right.

First of all, both management and the board are often too close and emotionally involved to make a clear decision. Having served on more than my share of boards, and often on the comp committee, I am often asked about the following situation, which is typical of one where a carve out occurs:. In this case, the common stock and options are essentially worthless.

Of course, all of this looks much better when the company sells for a lot more than was invested! You must be logged in to post a comment. Angel Investing , Boards , Exits , Investment Terms , Startups. September 27, dan Leave a comment.

Having served on more than my share of boards, and often on the comp committee, I am often asked about the following situation, which is typical of one where a carve out occurs: A company has taken quite a bit of investment, usually from institutions and angels.

Good terms for companies meeting their goals are 1x participating preferred sometimes capped ; bad terms are 2x to 3x and usually granted when a company is in trouble and needs to raise money. Acquisition seems like the best alternative, but the offers are for less than the liquidation preference or not much more than the preference.

What is the board to do? Here is my perspective from serving on dozens of boards and many comp committees: This needs to be rewarded. On the other hand, the board needs to recognize that management did not deliver the value that was promised when the money was taken.

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Nor did the board. It is not fair to give management a great return, while investors lose money. The board should try, as a first priority, to ensure that management gets a good deal from the acquiring company.

This is good for the acquirer and allows more of the proceeds to go to investors. And therefore they would rather the company stay in operation, even if it means a greatly reduced valuation. This is why alignment with the entrepreneur and deal terms can matter.

Carve-Out

Finding a fair solution is often difficult. If a carve out is necessary, I believe that it should be graduated like a graduated income tax.

Carvey®

In that way, as the investors do better, management increasingly does better. Previous Post Alliance of Angels Needs a New Managing Director Next Post Should Entrepreneurs Pay Angels? Leave a Reply Cancel reply You must be logged in to post a comment.