Matt Matros built Protein Bar from a single smoothie shop into a fast-growing chain.
In 2012, private equity firm L Catterton came knocking with a deal valuing his company at $44 million.
Matt decided to roll 40% of his equity, expecting it to grow even more.
In this episode of Built to Sell Radio, you discover how to:
Navigate the risks of rolling equity: Learn why Matt now regrets rolling equity and how the liquidity preference given to investors could leave him with nothing.
Understand the implications of a liquidity preference: Find out how the investor’s preference means they get paid first, and why this can wipe out the value of your remaining equity.
Avoid common pitfalls in private equity deals: Get insight into the clauses and terms you need to watch out for when considering rolling equity.
Listen to the episode to hear Matt’s eye-opening story and his advice on how to protect yourself when selling to private equity.
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About Matt Matros
Matt Matros is a serial entrepreneur with a notable presence in the Chicago food and beverage industry. He founded Protein Bar and Limitless Coffee, aiming to offer healthier food and cleaner coffee options.
He’s also involved in various entrepreneurial ventures, providing mentorship and acting as an investor or advisor. Matros believes in creating products that fulfill a consumer need, emphasizing the importance of a brand promise and differentiation in building a brand.
Definitions
Due-Diligence: This is a comprehensive appraisal of a business or investment undertaken before a merger, acquisition, or investment. It seeks to validate the information provided and uncover any potential risks or liabilities.
Earn-out: This is a financing arrangement for the purchase of a business, where the seller must meet certain performance goals before receiving the full purchase price. It reduces the buyer’s risk and aligns the interests of both parties post-acquisition.
J-Curve: In business terms, think about when a company spends a lot of money upfront—maybe on new equipment or marketing—which initially seems like a loss. But then, this investment pays off big time, leading to much higher sales or profits than before. That initial dip and sudden rise in performance is what we call the J-curve effect.
Letter of Intent (LOI): This document outlines the basic terms and conditions of a deal before a formal agreement is drawn up. It serves as a mutual commitment between the buyer and the seller to move forward with the transaction on the agreed-upon terms.
Liquidation Preference: Let’s say you’re at a party, and everyone at the party has chipped in to buy a pizza. But before the pizza arrives, the party gets cancelled. Now, you’d want to make sure you get your share of the money back that was collected for the pizza, right?
In the world of business, a “liquidation preference” is a bit like that. It’s a rule set in a contract that says who gets their money back first if the “party” (in this case, the company) has to shut down and sell off everything it owns.
Usually, this rule is set up to protect the people who took the biggest risk by investing money into the company. These folks usually own something called “preferred stock,” which is a special kind of ownership that comes with some extra privileges. One of those privileges is often a liquidation preference.
So, if the company goes under or is acquired, the people with the liquidation preference (usually the investors or preferred stockholders) get in the front of the line to get their money back. They get paid before anyone else, like employees who own regular shares (“common stock”) or lenders who the company owes money to.
In simple terms, a liquidation preference is like a VIP pass that ensures you get your money back first if a company has to shut down or gets acquired. It’s a way to protect the investment of people who put in money, often at the early stages when the company is most at risk.
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