19. June 2025
Founders Lucky Break Turns Sour As Controversial Equity Deal Raises Red Flags Over Company Future
The Strategic Warrant: A Double-Edged Sword for Founders
Daniel, the CEO of a SaaS company in Environmental, Social, and Governance (ESG) compliance automation, had just closed the most critical deal of his startup’s journey. After three years of unwavering dedication, a global industry leader signed on as a commercial partner, marking a turning point he had been working towards. The agreement included a side letter granting the partner a warrant, or an equity stake tied to the value they were expected to help create.
The clause also included a 90-day notice requirement before any mergers and acquisitions (M&A) or financing event. At first glance, this seemed like a fair price to pay for growth. However, two years later, it became a barrier Daniel could not work around. The experience serves as a cautionary tale for founders considering similar deals, highlighting the importance of carefully evaluating the potential consequences of including strategic warrants in their agreements.
Long Notification Periods: A Barrier to Future Growth
After five years of writing checks, Daniel’s early investors were seeking liquidity. Potential acquirers emerged, but they walked away after seeing the 90-day notice clause. Even though there was no Right of First Refusal (ROFR), buyers did not want to submit a letter of intent and wait on the sidelines while another party had advance visibility.
This lack of clarity on when the notice period started alone was enough to scare off offers. A well-crafted ROFR clause can provide investors with a sense of security, allowing them to feel confident that they will be the first to receive an offer if their interests are called upon.
Strategic Partners: Blockers of Growth Through Perception
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.
This phenomenon highlights the importance of carefully evaluating the potential consequences of including strategic warrants in agreements. What may seem like a harmless clause at first glance can have far-reaching implications for a company’s growth and trajectory.
Loss of Control: A Clause That Turns Veto Into Power
Five years after the first investment, Daniel found himself stuck. Every major move such as raising new capital, engaging acquirers or forming partnerships required him to consult with his strategic partner. A clause he once viewed as routine had turned into a veto on his company’s future.
This experience serves as a cautionary tale for founders who underestimate the power of strategic warrants. It is essential to have an open and honest discussion with potential partners before signing an agreement, aligning expectations and agreeing on a clear process.
To avoid this situation, founders should consider the following strategies:
- Notify the partner within two business days of receiving an initial investment or letter of intent (LOI), allowing them to submit a competing offer.
- Allow 14 days for the strategic partner to respond, giving them sufficient time to weigh their options without feeling rushed.
- Restrict competitive interactions to specific use cases or regions, rather than blanket limitations.
By adopting these strategies, founders can create a more equitable partnership and avoid the risk of losing control over their company’s trajectory.
The Importance of Designing Incentive-Aligning Clauses
Legal clauses meant to align incentives can become structural obstacles if not carefully designed. It is crucial for founders to approach these agreements with an eye toward long-term returns for themselves and their shareholders.
Daniel’s experience highlights the need for founders to critically evaluate the potential consequences of including strategic warrants in their agreements. By doing so, they can create a more sustainable partnership that fosters growth and innovation, rather than stifle it.
As Itay Sagie, a seasoned strategic adviser to tech companies and investors specializing in strategy, growth, and M&A, notes: “Founders must prioritize aligning incentives with long-term goals and values. Strategic warrants can be a powerful tool for growth, but only when designed and implemented thoughtfully.”
In evaluating the strategic warrant’s impact on their company’s growth, founders should consider multiple factors, including the potential benefits of strategic partnerships, the risks associated with long notification periods, and the importance of designing incentive-aligned clauses that promote collaboration and innovation.
By taking a proactive approach to these agreements and adopting strategies that mitigate risks, founders can create more sustainable partnerships that drive long-term success.