Reading: Introduction to Financial Deal Making

The logic behind most financial deals directly incorporates the considerations from the previous page. Financial deal making focuses on the following three key elements:

• Division of financial returns
• Reward investors for their investment and protect their financial claim
• Incentivize the entrepreneur to work hard, maximise the value of the firm, and stay with the firm
• Also provide the investor with incentives to add value!

• Allocate control dynamically
  • Give control to the entrepreneur if things go well
  • Shift more control to the investor if things do not go well

• Path to exit
  • Provide incentives to achieve a liquidity event within the predefined investment period
  • Grant the investor the right to force the company into a liquidity event (even against the will of the entrepreneurs and majority shareholders).

The remainder of this module is about these three dimensions, their implications for the investor and the entrepreneur, and how to implement them in reality.

A useful starting point for this discussion could be to think about whether the traditional financing instruments of debt and equity can accommodate the different needs of the entrepreneur and the investors with respect to the three major deal elements. This is the next topic.