Preference shares and venture capital are bed mates, they’re with you whenever you do a deal in private equity. However, under Shari’ah (Islamic) principles, preference shares are not acceptable and by definition considered as debt, that a) gives you a priority and b) gives you a fixed coupon (interest).

Working with Venture Capital Bank, I’ve also had the honor of interacting with Sheikh (Dr) Nizam Yaquby. He is not only a businessman, but also a pre-eminent Shari’ah scholar who serves on over 40 boards. One of the things you learn immediately is that Islamic law does not allow the use of conventional debt and preference shares.

The answer is: No.

So what is the solution, well there is none. That’s not exactly what you might like to hear. The only alternative is to use convertible notes that allow you to convert your profit covered facility to equity at a point in time.

Under Shari’ah rule, the basic principle is that you should participate in the same risk as the owner of the company. By doing so, you will share in his profits and gains. However, with preference shares the risk is skewed, where preference shareholders have less risk compared to ordinary shareholders. There are two instances where preference have ‘preference’, and thus lead to the logic that it is not acceptable from a Shari’ah point of view.

Upon Liquidation…

If the company is liquidated or wound up, preference shareholders are given priority over ordinary shareholders to claims on company assets (just after bond holders). This could lead to situations where the preference shareholders receive the full par value of their shares.

Upon Profit / Dividend Distribution…

The second instance is when dividends / distributions are paid. Preferred shareholders generally receive better returns on their investment (think about Warren Buffet and his Goldman Sachs investment). Profits generated go to preference shareholders according to the specified coupon / dividend rate. After this, what remains, if any, will go to the ordinary shareholders. In some instances, when dividends are not paid out in a particular year, they will be paid later as a cumulative dividend (also called cumulative preference shares).

Now, what do you see as the advantage or disadvantage of dealing with Islamic investment institutions?

During every deal, we enter a phase of negotiation, where we fight over everything from the sale and purchase agreement to the shareholders agreement. The last thing you want is for the deal to drag on. The longer the negotiation takes, the greater the chances of it falling apart. It wastes your time and energy. So when I came across contrarian expert negotiator Jim Camp. A light bulb switched on. Here is a guy who is dead against win-win negotiations, and for a valid reason.

Need Vs. Want

The start of all your problems in life is when you can’t differentiate between ‘need’ and ‘want’. Buddha talked about this in another way, what people call “Samudaya”, that suffering arises from desire. Desire can be closely connected with ‘want’. You need food, water, air. But you want that car or holiday. Substitute the word ‘desire’ for want and you’ll get the drift.

When you want something, you give yourself over to emotions. Top negotiators understand this weakness and take advantage of it. Yes, the very same win-win negotiators are out there to whip your rear-end when they know that you’re looking for a win-win situation as you’ve been taught to compromise. Next time you negotiate, try to show that you’re not needy but want to do the deal – let me know how it went.

Power of “No”

The moment you say “no” to something, you open up new doors. Not “yes” or “maybe” but “no” (‘maybe’ is the worst position to be in, it’s negotiation limbo). No shows that you’re not “needy”. But get this straight, a negotiation by definition is the agreement between two or more parties, wherein all parties have the right to say “no” or veto.

“No” is just the start

Inviting others to say NO is just the start. When Jim started coaching me on negotiation, things changed. Big time! He pointed out some of my flaws and how I was losing out. Within two months of adopting his system, I managed to negotiate not just a promotion, but a 25% raise during the most tiring recession in this decade. Can you beat that?

Get started at Jim Camp’s Negotiation Institute and remember to check out the free negotiation tools. If you’re signing up for his coaching, please feel free to reference me.

If you’re an investment banker, venture capitalist, or private equity professional like me, odds are you have a large professional network. You’ll probably be required to keep a diverse portfolio of relationships to cover every aspect of the deal, this includes multiple groups of people that are active at different stages of the deal making process including entrepreneurs, lead investors, co-investors, legal advisors, board members and executives. To bring sanity and balance to life, I have a solution. Read on…

As an Ambassador for myGreenlight aka Keith Ferrazi’s Relationship Master Academy, I’ve enjoyed discussions about how to manage a huge number of contacts online, with Linkedin, Twitter and Facebook all vying for your attention. Gmail Contacts is good, but has its limitations. Being able to collaborate with team members and stay on top of what was said with a particular contact has been essential for me lately. Step in Highrise CRM from 37Signals is a cloud-based CRM site. With Highrise, you can manage all contacts, deals and conversations in one place online. Rather than talk about it here, let me point you to this excellent 1 minute video to get you started.

Highrise isn’t the only web-based contact relationship management online, there are others, but two worth talking about because you’ll use them 1) Connected 2) Graphight

Tomorrow being Labour Day and with unemployment so high and thanks to a global recession, things don’t seem to be getting any better! So I thought I’d help the world economies bounce back, by finding these ‘unemployed’ a way to find work for life. These tips are simple and straight forward. The only catch is they’re not easy, and that’s why only 3% of people who read them will actually succeed:

1. Start a company: Why become a job hunter, when you can become a job creator. Start a company. Fail. I don’t care, you’ll learn a lot, make more contacts and live to tell a story.
2. Bypass HR: As much as I appreciate the Human Resource club, I think they should be more strategic, i.e. at the board level. My wife used to be in HR, after she quit… she discovered her own passion and converted it into a flourishing venture! I joke with her, the only reason I’m employed is because I didn’t go through her tribe of people.
3. Work for free: You heard me, work for free, this is how I got my first job. If you’re so damn good that people should pay you for it, offer to work for free, for a fixed period say 3 months, without pay or any requirement to pay. And after that period, ask them if they are interested in hiring you. If you work your butt of in those three months… you’ll never look back. It is those who give, who actually get. So be a giver, and earn yourself dividends.
4. Ask for referrals: Nothing better than having word of mouth introduce, or vouch for you. Your value goes up immediately. Nearly all those who fail to find a job, are those who are afraid to ask. I don’t mean shooting off emails blindly, I mean meeting in person, or calling a person and talking one-to-one. Remember ‘Never Eat Alone’.
5. Learn to negotiate: Easier said than done. There’s a whole topic on the proper way to negotiation, and it starts with “No”. But just remember this, you don’t get what you deserve, you get what you negotiated.
6. Think Different: If everyone is doing it and doesn’t work, why do you think it will work for you? Setting yourself apart from others isn’t difficult. Just do things differently and don’t follow the crowd. Be unpredictable. Take risks. If you have the guts, be a Rule Breaker*.
7. Test Everything: Don’t take anything for granted. There’s a saying, what cannot be measured cannot be managed. If you want to manage your career, start measuring what works for you and what doesn’t. Focus on what works, and ask the right questions, start with interrogative questions; why, what, whom, where and how. Test your emails and communication, test your tone, test your body language, test your assumptions.
8. Brand You: I borrowed this term from Tom Peters, if you’re not a brand, you’re nothing, you’re basically a commodity. What’s your story? As my friend Kasif Khan once said, “Kasif Khan is a brand, it’s not just a name”. That’s the kind of oomph you need!
9. Be Specific: You can’t be a Jack of all trades. If you do, you’ll know why people say you don’t know ‘Jack Shit’. Start learning to say “NO” to things. Be a specialist not a generalist, and leave this world a better place to live.
10. Figure it out: Improvise, there is no 10th tip/step/secret. You have to use your G-d given brain. Be creative and share your own tip below (remember, in order to get, you have to give).

I got the idea of writing this post after reading Ramit Sethis’ Dream Job (must visit). The fact of the matter is that I have my Dream Job (Thank G-d!) and I thought I’d just share some of the lessons I learned along the way…

If India wants to become a technology superpower and attract investors, she will have to change her current mindset. Right now the government and the political parties do not have the will power for that. We’re talking about a 65 years of democracy, but we’re still acting as though there is no such thing as freedom of speech (btw, throwing stones or chappals is not freedom of speech).

When India’s Union Minister for Communication & IT, Kapil Sybil took a strong stand against internet companies, instructing them to start screening information (‘objectionable content’ in his opinion) on their social media sites for defamatory comments against the government, political leaders, he failed to understand that creativity and innovation happen because innovators, the rebels, the rule breakers think differently. He identified the problem, but not the cause (corrupt government, shameless politicians).

It’s difficult to have technological innovation without any political implication. That’s because we’re talking about disruptive technologies, and creative people imagine weird and whacky ideas. Curbing creativity is a sure route from India’s silicon valley ambitions to the valley of death and destruction. Just ask Google, Facebook and Twitter…

In Sir Kapil’s case, when the corporate powers that be (Facebook, Twitter, Microsoft, Google and Yahoo!) refused to cooperate with his impracticable demands, and the people of India spoke (I guess through social media), the government seems to have changed its stance. That my friend is democracy.

Why should you tax Entrepreneurs or Business Owners less than others? The answer is simple: they create far greater value with added risk. Recently people have been amazed that Warren Buffet pays a lower tax rate than his secretary. So be it. Warren Buffet created value as an entrepreneur, he took risk to start his own venture and later on grow Berkshire Hathaway to where it is today. His secretary on the other hand… well does what secretaries do. Now do you think it is fair for a Government to tax those who create value, jobs and wealth whilst taking on the risk of failure? I sure do wish the Indian Government and our political babus understood this and did something permanent for entrepreneurs. (If anyone knows Shashi Tharoor, please push this idea of lower taxes for business).

Meanwhile, time for another illustration, again from the Kauffman Foundation. If you really want to understand the above better… then watch this. And make sure you push for lower taxes. You’ll do the whole world a lot of good!

I’ve always enjoyed sketching. The creativity involved is really amazing, how people can illustrate their ideas with images! Well, as a venture capitalist and merchant banker, explaining “Venture Capital” to ordinary people is not easy. So whenever I come across really great illustrations, I like to use them to teach.

Here’s one by the Kauffman Foundation, an initiative to educate entreprenuers. The narration is provided by Paul Kedrosky, of Infectious Greed. What do you think?

Being a deal maker, requires being part super networker, part financial wizard and part legal eagle. Nevertheless you don’t need to do it all by yourself. For legal, you can get help from good a lawyer. However, you do need to be familiar with the basic documentation that make deals happen. It’s amazing how much you can do with a simple piece of paper with words and a signature!

During the process of dancing with your private equity friend, you may come across three key types of legal documentation, the 1) NDA or Non Disclosure Agreement (also called Confidentiality Agreement), 2) the Term Sheet (also called Letter of Intent) and 3) the Definitive Agreements (that include Share / Stock Purchase Agreement aka SPA or Asset Purchase Agreement aka APA and in some cases an Investment Agreement) and miscellaneous complementing agreements such as the Employment Agreement drafted to incentivize your investee management team or the Financial Advisory (Management Consulting) Agreement drafted to make the private equity house some annual income.

Later on, we’ll only go into detail with the Term Sheet as it forms the basis for high level terms and conditions of a deal. This is where the art of deal making starts and you will get a feel for whether a deal will materialize, where the expectations of both parties are managed. Once both the private equity financier starts to tango with the entrepreneurial founder, you will see how both mature into a serious buyer and seller. Like any negotiation, it will involve a bit of pulling and pushing. If you’ve reached this stage, you’ve reached far, but it ain’t over till the fat lady sings… and with the Term Sheet, she’s just started eating!

A Term Sheet (or Letter of Intent in legal parlance) usually provided by a private equity firm is a pre-acquisition / pre-funding agreement that shapes the understandings of both parties. The purpose of the Term Sheet is to outline the proposed transaction terms as well as indicate the value of the transaction.

Although usually non-binding (with the exception of NoShop / Exclusivity / Confidentiality), it serves as a bridge of good faith between the initial negotiation and the definitive agreements. Consider it a tool for facilitation. The Term Sheet spells out the preconditions to closing the deal, such as due diligence, price, payment terms, exclusivity, valuation and can get as complicated as you want depending on what stage you are at in your discussions. If all terms are agreed, the terms signed upon become a proxy and form the basis of the definitive agreements which are drafted by the lawyer.

Generally private equity firms will take the first mover advantage of drafting the contract. This is a tactic we use with any agreement. It’s costlier in terms of legal fees, but that’s a part and parcel of being a financier. We’ll get into more advanced discussions on the various terms and conditions, or what forms the anatomy of the term sheet, including but not limited to:

• Binding – Confidentiality
• Binding – Expenses
• Binding – Go Shop
• Binding – No Shop (Exclusivity)
• Binding – Non Compete (CNC)
• Board – Composition
• Board – Election
• Indemnification
• Legal – Fees
• Legal – Opinion
• Pay To Play
• Preference – Liquidation
• Preference – Participation
• Preference – Dividend
• Provisions – Protective
• Provisions – Lock up
• Representation & Warranties
• Right – Anti Dilution Rights
• Right – Drag Along Rights
• Right – Conversion Rights
• Right – Future Rights
• Right – Information Rights
• Right – Management Rights
• Right – Pre-emptive Rights
• Right – Redemption Rights
• Right – Registration Rights
• Right – Right of First Refusal (ROFR)
• Right – Right of First Offer (ROFO)
• Right – Tag Along Rights
• Right – Voting Rights
• Valuation
• Vesting

Although the above may sound like greek or latin to some fresh entrepreneurs, the fact remains that the Term Sheet consists of many moving parts, for which valuation is just one part of the equation. (And btw here’s something from the trenches: we bankers never quote a hard and fast valuation at the beginning, its always a “range”. Counter tip to deal with us: Never use the word “between” instead use “above” when discussing valuation.)

I’ve been thinking about putting together a good handbook for private equity professionals (venture capitalists can also learn from us!), one that not only covered technical subjects but one that would also touch upon the nuances of deal making. But I didn’t want to limit it to just us investment professionals, I also thought about the many other skill sets that could be learned and used in business. Accordingly, I came up with the following sections that I thought every upcoming deal maker should be familiar with:

1. Anatomy Of The Term Sheet
2. Negotiation Strategy Skills
3. Relationship Building Skills
4. Valuation & Financial Analysis

What do you think? What would you like to see in these sections? Email me, it’s the fastest form of communication!

I initially subscribed to the idea that meetings are/were a waste of time. Hyped by founders of 37Signals, in their book Rework, Jason believes that meetings are toxic and promotes the same in their website: Boycott A Meeting Day. But then if you’re a thinking animal, you’d at least wonder what their agenda was, why are they pushing this idea. They sell productivity web-based software. Aha!!

The logic was that if you had a one hour meeting with five of your team mates, you’d be wasting not just one hour but five hours. Yes, one hour of each person. Okay… fair enough.

But sometimes life is not about productivity only, it’s also about relationships. We are after all, the social species. In fact, more business is done through relationships than through just being productive or hardwork.

If you have nothing new to discuss, or find that time flies by in a meeting. Don’t sweat. There’s a thing called team building (unfortunately, today’s iPod generation don’t understand this too well), it’s about understanding how everybody responds to work related matters. Just consider the meeting time as a way to get to know each other better.

If you look at the reasons Jason and David fire out, you’ll start to realize they don’t understand how to do meetings well. Their suggestion to avoid them is at best a false sense of ‘I know this better than you do’. They’re probably social and life skill disabled (I don’t blame them, they’re geeks). Or they’re just pure genius; sell people on the idea that meetings are a waste of time – and convince them that this ‘special’ software is the best solution. Hmmm… reminds me of web-conferencing companies selling the hazards of flying.

What is the solution? Know what kind of meeting you require, there are various types. And for heaven’s sake – don’t blame the people who attend it, blame those who lack a clear Mission & Purpose. (That’s usually the founders of the company!)