Hard Lessons: Pay Your Lawyers, Align Incentives & Why a $90M Exit Paid the Founder Only $2M | FOC

0:03So, Isaac, I'm going to turn to you now. what's a lesson, an expensive lesson you learned, a valuable lesson or a surprise that you could tell the audience today? From an investor standpoint or from a company operator? Company operator.

0:22Or investor, whatever your background, whatever you feel. Yeah, well, we're on both sides. So I pay your lawyers, man. I hope there's no lawyers in here, but my family came from attorneys. My dad was in finance, but until you can really get to a point, you have big law lawyers and you have people who just so happen to have a JD, and I just think, make sure you have an expert in your corner, whether it's a term sheet, whether you're an investor, whether you're an operator, you mentioned capital becoming harder, which just means investors having better terms. Well, if you have a private equity fund or a VC fund who's paying DLA or Cooley or some type of really prominent expert lawyer, they're drafting a term sheet for a founder who needs capital yesterday.

1:20That's a tough position. Make sure you protect yourself. Make sure you have good good lawyers in your corner. And it sounds obvious, but man, just pay your lawyers. Get a good lawyer, just pay what it is. Hopefully you can negotiate some type of good structure. But it's more expensive to pay a cheap lawyer in the back end than whatever you have to pay in the front. So that would be the first thing that comes in mind. I'd agree with that. Having a good attorney would make a huge, huge difference on the M &A side of things and any part of the deal. Jack, same question to you. The question was about the most painful experience in investing or something, right?

2:03Correct. I have a lot of painful experiences in investing. I could share all kinds of trauma with the room. But one that I'll cite is the very first private investment that I personally made, which was way back last decade. And it was in a company that I put money into. And at the end of the day, I lost money on the opportunity. The founder, the entrepreneur, did not. He walked away with some substantial money. So the point of my point here is you have to have incentives aligned with the founders and the investors. Who here in the room has heard of the book, The Richest Man in Babylon? Almost everybody.

2:40It's a relatively basic finance book. It's often assigned to high schoolers. It's actually one of my favorite finance books. And one of the fundamental principles that they make in the book is you should invest your capital. It should be earning a return for you, but you should also invest your capital with someone that knows their business. The story in the book is you put money in with a jeweler if you want to go into the jewelry business. It's the same idea in any kind of a private investment philosophy. There should be two fundamental concepts that I'm always looking out for that I've been burdened on in the past.

3:11The first one is the founder should actually know the business. This is a person and that should have a track record of success in the business. And the second is that the founder and the investor have to have their incentives aligned. So we talked about preferential equity returns in the past. Any investment opportunity and a private opportunity should include some skin in the game for the sponsor or the entrepreneur. And it should be structured in such a way, such as the limited partners are receiving their capital back first before the founder or the entrepreneur. Limited partners or private investors typically don't have a lot of control over the deal.

3:47It comes down to the sponsor. It comes down to the principal. So the trade-off for them having that control is they've got to take care of their investors. And the best way to do that is by legally guaranteeing that the investors have a right to receive a return on their investment before the principals take their money out of the deal. Agreed. On the entrepreneur front, I think my learning, It was a bit painful, but was when I needed to let go, meaning step aside from the business, right? So I've done it multiple times, but you build 26 plus businesses, you find sometimes you're the problem. And it's not about you.

4:27You might have founded the business, but it's not about you. It's about the mission, vision, values of the business, delivering amazing returns to those investors, providing value to the world. That's what it's about. So there have been times where it took me too long to fire myself or bring in the right player and let the company continue to perpetuate. On the private investment side, I would say learning my strengths and areas and where to vet a private investment and then leveraging the right people for the areas that I don't want to vet. So I like vetting the leadership teams, the structure, the talent, strategy, etc.

5:05I don't want to dig into all the finance and the legal documents. That's why I worked with Jack, you know, to vet a lot of different deals and have the right attorneys present. So, you know, leveraging teamwork where appropriate. Awesome. Thank you. Repeat the question for me, please. Yeah. What's a valuable lesson or a surprise that occurred when expensive, you know, something that you would tell the audience? Well, it's kind of hard, really, because since I am a new founder, I don't have all those experiences yet. It's okay. But there will be. Yeah, there will be. One thing I expect is there's going to be hurdles in our development.

5:43There's going to be huge hurdles, setbacks. Maybe, hopefully not. But when you have those, you can't just stress about them, worry about them. You have to continue validating each stage. And during that time, when you get through that, you'll find out that there's more capital to go to the next phase. So our company is driven on basically stage validation, which enables the next stage and the next phase. I'll add one more if I can. You said something that we did a deal. Companies sold$90 million. Founder took home two, you know, just because of how much capital was raised throughout the process and some of the terms and, you know, folks had to get paid back.

6:31I mean, that's the big number in the headlines. And post-tax, post-terms, you know, two million bucks is a lot of money. But that one you sold for 90. So, you know, just be conscious of that as you raise capital, you go through some difficult times. And, you know, not all money is the same. So just to be mindful of the type of capital you're raising, when you're raising it, from who. And so trying to find alignment. alignment means both sides, you know? And so as a founder, any operators in here, I just think that's important. We've definitely seen some deals where a lot of money was left on the table from their aspect.

7:10Awesome. So we're almost out of time. We've only got a couple minutes left, but any final comments or anything you guys want to add? Anyone? I have one that I'll volunteer. here, the panel's about seed investing. So I just want, everyone's already aware of this, I think, already, but seed investing is very different than Series A or future investment rounds, especially for a business. If it's a business that's a little bit more mature, if there's a minimum viable product, for example, for a technology platform, or there's already a business that's up and running in one respect or another, there's a lot more flexibility in where that money comes from.

7:47Serious professional investors will look at that opportunity. If it's truly seed stage, if it's pre-revenue, if it's ground floor opportunity, an entrepreneur needs to be realistic about where that first money is coming from. And typically, investors are investing in the person. They're not investing in the business. There isn't really a business yet, typically, for a seed stage investment opportunity. So if you're a founder, if you're an entrepreneur, if you're going out and raising money for a new opportunity, be prepared to ask the people closest to you to invest in you. because that's generally where your first capital is going to come from, someone you already have an existing personal relationship with.

8:26We get approached all the time by investors that have a new business concept, they haven't yet raised any money, and they have this attitude that the first money can come from a total stranger. Well, okay, I mean, that works maybe for someone like Elon Musk that has an incredible track record, not that he needs really outside capital from anyone else, but unless you have an extraordinary track record, unless you're a celebrity and you're well-known internationally, be prepared to dig into your own pocket. Be prepared to approach your own contacts. Show an external investor that you have the capacity and the willingness to go out and approach your personal network and take money from your friends and family and risk that money if you're asking a total stranger to do the same on your behalf.

9:12Awesome. So I think we're out of time. I see them waving us down. I don't want to joining us this was an awesome panel join the family office club by visiting familyoffices.com we look forward to seeing you at our next live event

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