I thought I had enough money not to have to worry about money, so I went into a period of retirement. That lasted about three months before I got bored and decided to invest in a new business, Skydome.
Skydome was a skylight product that allowed you to plumb light down into dark areas of your home. We developed the product, tested it and started selling it.
I initially invested £200,000 and managed to get some small government employment grants. The product took off and we were selling it by the container to Australia.
The success meant that I needed to invest more money into business, so I invested another £200,000. Sales continued to grow so I had to invest more and more in the company. I didn’t mind as I was investing in success, or so I thought.
More great sales meant more cash out of my pocket. Before I knew it, I was almost into this accidental investment for £1 million! But sales were booming and the company was taking off.
I decided that I needed to bring in additional investors as this little puppy was starting to seriously eat into my personal nest egg.
This was when I made my first big mistake. I sold 25% of the company to raise additional capital to fund the expansion, but unfortunately I had never heard of “pre-emptive rights”, sometimes also called “subscription rights”.
Pre-emptive rights are a clause in an option, security or merger agreement that gives the investor the right to maintain his or her percentage ownership of a company by buying a proportionate number of shares of any future issue of the security at a prearranged price.
This was where I messed up. If I had inserted a clause into the agreement that insured that my shareholding could not be diluted below a controlling amount, I would have maintained control of the company.
What happened was we needed to raise even more money and for me to keep my shareholding above the 50% stake, I would have had to reach into my own pocket for another £200,000. I decided against it and my shareholding dropped to 35%.
Essentially I had lost control of my own company. I should have inserted clauses saying that I could buy at the original valuation, or issued a different class of share that did not have equal voting rights. I was ignorant of all of these now obvious options.
Deciding when to bring additional capital into your business is critical. Wait too long and you will miss great opportunities. Bringing in additional capital too early and you will be selling yourself short and not getting maximum value.
The key is to get really good advice as to how to structure fundraising. You shouldn’t just look for guidance during the initial capital expansion, but also with any future funding that you will need if your success continues.
I lost control of my company unnecessarily, do not make the same mistake!