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Small-Cap Companies Versus Hedge Funds
Key considerations for directors:
• Small-cap companies are often at a disadvantage when negotiating against hedge funds to modify prior financing agreements.
• Understanding the business and psychology of hedge funds is a prerequisite.
• For many hedge funds, profit-and-loss impact of a financial modification is more important than what “might be best for shareholders.”
Common mistakes to avoid:
• Planning on leniency from hedge funds when material financing terms are breached.
• Ignoring the business reasons behind affirmative and negative covenants.
• Seeking waivers for financing provisions without requisite understanding of and regard for the impact on a fund’s profit and loss.