Here’s one to keep in mind – we did this a few times at Return Path, and I was just reminded of it when I was coaching another founder who is doing the same thing right now.
Sometimes when you’re doing a strategic acquisition and it’s an all-stock deal, you can insist as a term of the acquisition that the target company’s investors invest more capital into your company.
That’s right, not only do you not have to put cash OUT for the deal, you’re getting additional cash IN. Think of it as a contemporary corporate version of the dowry.
Why would the cap table of the target company agree to this? Here are a few reasons:
- you’re in a strong enough negotiating position – best home for the business, best chance of the target company investors getting a return
- the target company investors have more dry powder and want to double down – they love your vision for the combined company
- you’re only offering the target company investors common stock in the deal, and they are pushing hard to get preferred
The Dowry is not something you can get to with every deal, and you might not need it. But think of it as a tool in the M&A/financing tool belt.