10.31.05
Strategic Investment Structure I
As I talked about in my last blog, strategic investment has different focus from pure VC investment. As such, strategic investor might ask for a side letter with a few unique items depends on the investment intent. Below are some of the interest items strategic investor might ask for.
- Observer board seat. This is a balance act between liability and visibility. Strategic investor wants visibility without liability. This is a quick and easy way to get an insider’s view without too much liability although the situation is changing.
- Right of notification, right of first negotiation, right of first refusal etc. These are used to have visibility into a potential transaction by a competitor so that a strategic investor can move in first to protect its investment interest. Ask if you need to know more.
- Block list of acquirers. Typically, a strategic investor does not want to help to build a startup, and then allow it to be taken away by its competitor. Whether it is used depends on how strategic an investment is. This should be considered carefully by founders since it reduces the potential exit options and future financial outcome.
- Publication right. Some strategic investors might want to protect its strategic intent and not allow the investment to be public. For that reason, a publication right requires the startup to check with the investor before making its any kind of announcement associated with that investor.
Depends on how strategic an investment is, there are various other ways to balance the strategic intent with financial outcome. As a startup, you need to be careful to understand pros and cons of what a strategic investor can bring to the table.
