According to the financial press, private equity investors are holding huge sums waiting for the right private company in which to invest. In late March, CNBC reported that private equity firms have a staggering $1.5 trillion in cash on hand (more than double the amount from five years ago) and that they are actively seeking deals in the travel, entertainment and energy industries. In April, Vanity Fair stated that in each of the past four years, private equity managers have raised more then $500 billion for investment, and noted that from 2013 to 2018, more private equity deals took place than in any five year time frame in American history.
Private equity firms are not the only ones who are making investments in private companies. Angel investors and others are stepping up to fund privately held businesses, and there are many documented success stories of individual investors who have struck platinum with their private company investments. It is is also true, however, that a sizable number of fast growing private companies hit the rocks and burned through all or most of the funds that were invested in them.
The purpose of this blog post is not to help pick private company winners—that is a topic for others with the ability to discern which companies have the best ideas, management teams and the staying power to succeed on a long-term basis. But picking a successful private company is only part of the story. A private company’s success will not automatically make an investment in the business a success if the company’s governance documents do not provide the investor with a measure of protection on several important fronts. This blog post therefore focuses on the critical terms that an investor will want to secure in the company’s governance documents before actually making a substantial investment in the company. Continue Reading Looking Past the Face of the Shiny Penny: Check the Fine Print of All Private Company Investments