When Strategic Warrants Become Strategic Roadblocks
Daniel, the CEO of a SaaS company in ESG compliance automation, had just closed the most important deal of his startup’s journey. After three years of persistence, a global industry leader signed on as a commercial partner. This was the inflection point he had been working toward. The deal included a side letter giving the partner a warrant, or an equity stake tied to the value they were expected to help create. It also included a 90-day notice requirement before any M&A or financing event.
It was not a Right of First Refusal. Just a notice. At the time, it seemed like a fair price to pay for growth. Two years later, it became a barrier he could not work around.
Here are three key lessons for founders considering similar deals:
Long notification periods deter future buyers
After five years of writing checks, Daniel’s early investors were seeking liquidity. Potential acquirers surfaced, but they walked away after seeing the 90-day notice clause. Even though there was no ROFR, buyers did not want to submit a letter of intent and wait on the sidelines while another party had advance visibility.
The clause also lacked clarity on when the notice period started. Was it after an LOI, a board vote, or a verbal agreement? This uncertainty alone was enough to scare off offers.
Strategic partners can block growth through perception alone
Other large industry players, not direct competitors to Daniel but potential competitors for the strategic partner, declined to explore partnerships. They were concerned that any sensitive commercial information might be shared upstream. Even though there was no formal restriction, the perceived influence of the strategic partner made the company appear closed to outside collaboration.
The founder lost control of the company’s trajectory
Five years after the first investment, Daniel found himself stuck. Every major move such as raising a new round, engaging acquirers or forming partnerships required him to first consult with his strategic partner. A clause he once viewed as routine had turned into a veto on his company’s future.
The best way to avoid this situation is to have a candid discussion before signing. Align expectations with the strategic partner and agree to a clear, short-term process.
For example, notify them within two business days of receiving an LOI, and allow 14 days for them to submit a competing offer. This is not a ROFR, but it gives them a fair chance to participate. Also, narrow competitive restrictions to specific use cases or regions rather than blanket limitations.
Legal clauses meant to align incentives can become structural obstacles. It is critical to design them with an eye toward long-term returns for you and your shareholders.
Itay Sagie is a strategic adviser to tech companies and investors, specializing in strategy, growth and M&A, a guest contributor to Crunchbase News, and a seasoned lecturer. Learn more about his advisory services, lectures and courses at SagieCapital.com. Connect with him on LinkedIn for further insights and discussions.
Photo by Markus Spiske on Unsplash
