A Startup CEO’s Financing Cautionary Tale

Man Signing Contract

Utility companies lose $202 billion every year due to theft and technical inefficiencies that plague the worldwide electrical grid. As well, this unreliability puts public safety at risk because of overloaded transformers and illegal bypasses.

Fortunately, Awesense founder and CEO Mischa Steiner-Jovic and his team have developed hardware and software capable of eliminating these risks. Working with their enterprise level clients, Awesense is proving this global issue warrants serious attention.

While Awesense can be called a successful start-up by all accounts, Steiner-Jovic has learned a few startup lessons the tough way, and is kindly sharing his cautionary tale. He calls this “11 things to avoid when raising debt or convertible note financing.”

In September 2010 Steiner-Jovic chose to work with a regional development agency to secure funding with a convertible debenture. For an early stage startup, $100,000 looks really attractive and can help stretch the runway. At the time it seemed like a good plan. The right people were certainly saying all the right things.

But earlier this year Steiner-Jovic realized that terms of the deal were more like a noose around the company neck. The prospects of Awesense receiving a remotely fair valuation moving forward looked dismal.

Steiner-Jovic is open about his efforts to prevent this mistake from ruining the company. Somewhere buried in the terms and conditions fine print, the burden placed on the company he says included;

  • “No repayment rights. The lender refused to accept repayment because they knew that that the company was doing well.

  • Legal fees were tacked onto the loan. We had no control over how much those fees were.

  • The interest rate was 16%! Plus the interest converted as part of the principal.”

While he admits “raising debt or a convertible note can be a simpler way to get financing and move things forward in a quick manner. Make sure you clearly understand the terms and conditions that go along with the deal. If the fine print ends up being five times your height, you might want to run now.”

He wants new entrepreneurs to avoid the same mistakes, by remembering to:

  1. Make sure you have several experienced eyes look at the deal to help you.

  2. Talk to other entrepreneurs about the organization. Do they have a good reputation? How do they treat you when things get rough? Will they renegotiate deals in the future? What is their end goal (making money, help companies grow, etc.)?

  3. If they’re government funded, understand their objectives. It might not be what you think. Don’t think things will be all peaches and cream because you’ve had good dealings with other government organization.

  4. How experienced is the financing team? How many deals have they done in the current organization they are involved with? Are you the first one or second? What is the teams background? Do they understand financing? Have they built companies before?

  5. Get an understanding upfront about the legal fees for the deal. How are the legal fees covered? Negotiate to have each party cover their own legal fees if you can. If you are doing a debt financing deal, make sure that the legal fees are not part of the overall loan.

  6. Understand the financing rate.

  7. Make sure you have early prepayment rights. Otherwise, they’re maybe not aligned with your goals.

  8. Understand the conversion rights. What converts and what doesn’t? Does the interest accrued convert? Can you pay off the interest and only have the principal convert? What would their ownership look like if you exit? What does it look like in two, three, five and 10 years?

  9. Ensure they don’t require a board seat unless it’s really justified.

  10. Make sure you have great legal advice. How many deals have your lawyers done with this type of structure before? Get someone who absolutely understands what you are trying to do. Do not have a junior work on the deal, but insist that a seasoned lawyer review and work on the deal with you

  11. Have a temp CFO review the deal. Have your accountant (CA, CGA) review it as well. Fully understand all the implications of the deal now, and in the future.”

Revisiting the agreement and working towards more reasonable terms proved to be both challenging and distracting for Steiner-Jovic, but a more equitable deal was reached. At this point Awesense is now looking to the future with a cleaner cap table. In fact they have just been chosen to present at the upcoming Banff Venture Forum.

For Steiner-Jovic, one thing will keep resonating for sure: “if it sounds too good to be true…it is.”

John Gray

John Gray

John jumped into the start-up world in early 2009. He was co-founder of Mentionmapp, a visual analytics company that was acquired in October 2011. John is Launch Academy's Program Facilitator, and is leading their Lean Entrepreneur Program. He's a freelance writer, focusing on keeping the humanity in our conversations about technology. John has a B.Ap.Sc. in Communications and a B.A. in English, both from Simon Fraser University.