Everybody is talking about the evils of private equity right now. Hospitals hollowed out, retailers driven into bankruptcy, beloved brands stripped for parts. The outrage is understandable. But I think most of it is aimed at the wrong target.
You probably know the fable of the scorpion and the frog. A scorpion asks a frog to carry it across a river. The frog refuses: you’ll sting me. The scorpion points out that if it stings the frog, they’ll both drown. That makes sense to the frog, so it lets the scorpion climb on. Halfway across, the scorpion stings. As they both sink, the frog asks why. The scorpion answers that it couldn’t help it. It is, after all, a scorpion.
That’s private equity. It isn’t evil. It’s a scorpion. And if you’re a founder, the question isn’t whether the scorpion should change its nature. It won’t. The question is whether you understand that nature before you let it on your back.
An Observation, Not a Judgment
A private equity fund exists to do one thing: generate the highest possible return for its investors within a fixed window of time. That’s not a character flaw. It’s the job description. A typical fund raises money from pension funds, endowments, and wealthy families, invests it over a few years, and is expected to hand it back, with a profit, within about a decade. Every company it buys is on that clock from the day the deal closes.
Inside that structure, every decision answers to one question: what maximizes the return by the time we sell? Sometimes the answer is investing in growth. Sometimes it’s layoffs, loading the company with debt, selling the real estate out from under it, or borrowing money just to pay the fund a dividend. The structure doesn’t prefer one path over another. Your mission, your culture, your customers, and the community your company serves matter only to the extent they move the number.
Toys “R” Us is the textbook case. In 2005, KKR, Bain Capital, and the real estate firm Vornado bought the company for $6.6 billion in a leveraged buyout, meaning most of the purchase price was borrowed and the debt was placed on the company itself. Toys “R” Us went private carrying more than $5 billion in debt. Years later, members of Congress noted that the retailer was spending roughly $400 million a year just servicing it. The company filed for bankruptcy in 2017, liquidated its U.S. stores the following year, and some 33,000 people lost their jobs. The buyers collected hundreds of millions in fees along the way.
That isn’t an isolated story. One study of large public companies taken private through leveraged buyouts found that about 20 percent went bankrupt within ten years, compared with 2 percent of similar companies that weren’t bought out. Nobody set out to destroy Toys “R” Us. The structure did exactly what it was built to do, and the company couldn’t survive the weight.
The Problem Isn’t Capitalism.
Before we get to the terms, I want to address the mindset that walks founders into bad deals in the first place.
Too many people start a company planning their exit. It sounds savvy. In practice, it means building something designed to look valuable to a buyer rather than to be valuable to a customer. Put in as little as possible, get out as much as possible, and hope someone pays for the story before the cracks show. That’s a belief system that gets confused with capitalism all the time. It isn’t capitalism. It’s greed.
Capitalism is free markets, competition, and innovation. And its ultimate authority isn’t the investor. It’s the consumer, who decides every day where to spend. If enough people choose companies that stand for something, purposeful companies stop being a niche and start being the market. That’s a future worth building toward, and it won’t be built by founders designing houses of cards.
The irony is that companies built to last are the ones worth the most anyway. Build as if you’ll never sell, and you’ll have something worth buying. Build only to sell, and you’ve already adopted the scorpion’s nature yourself. I’ve written before that a business can only optimize for more. A founder with a purpose is optimizing for something else, and needs to protect that.
Be Honest, and Take a Hard Look in the Mirror.
Before you evaluate a single investor, you have to evaluate yourself. What do you actually want? Fast growth and a big exit, or a company built to last and make an impact? Put more simply: are you chasing money, or purpose?
Most founders answer “purpose” without hesitating. Then the term sheet arrives, the number has more zeros than anything they’ve ever seen, and the answer quietly changes. That isn’t a moral failure. It’s human. But it’s exactly why the question has to be answered honestly, and in advance. Once the money is on the table, nobody thinks clearly.
The honest answer may surprise you. If what you really want is to build something real, grow it fast, sell it, and move on to the next thing, a buyout fund may be exactly the right partner. Your incentives match. You aren’t the frog in that story; you’re both crossing the river for the same reason.
The real danger is the founder who talks purpose and walks money. The one who tells employees, customers, and himself that the company exists to make an impact, then signs a deal built for a five-year flip. When that deal goes the way its incentives say it will, it isn’t the scorpion’s fault. The founder never decided which river he was crossing.
So decide. Get clear on whose dream you’re actually chasing, and whether your company is a vehicle purely for financial gain or an expression of purpose. Neither is “right” or “wrong,”it’s just what you value personally. If the answer is purpose, everything that follows stops being a nice-to-have and becomes non-negotiable.
How to Take the Capital Without Getting Stung
Private equity can be a powerful resource. Capital, operating experience, relationships, and discipline are genuinely valuable. The goal isn’t to avoid it. The goal is to use it without handing over the thing that made your company worth investing in.
Know what kind of capital is across the table. A buyout fund wants control and an exit. A growth equity investor may take a minority stake and leave you running the company. A family office or permanent-capital holding company may have no exit clock at all. Ask every investor directly when their fund ends and how they plan to return capital. The answer tells you how long they’ll be patient with you.
Understand that control is the whole game. Owning a majority of the shares isn’t the same as controlling the company. The real power usually lives in the board seats and the consent rights buried in the documents: who can approve a sale, take on debt, hire or fire the CEO, or change the business plan. A minority investor with the right vetoes can run your company from the back seat. Read every one of them.
Read the debt and the waterfall. Be wary of any deal that places significant debt on the company, permits dividends funded by borrowing, or sells off your real estate to lease it back. And don’t fall in love with the headline valuation. Liquidation preferences decide who gets paid first and how much when the company is sold. A big number on the term sheet can turn into a small number in your pocket.
Write your purpose into the documents. As I’ve said before, every contract is private law you get to write. Use that power. Your mission can live in your operating agreement. Many states allow you to organize as a public benefit corporation, which legally permits directors to weigh purpose alongside profit. You can negotiate approval rights over your name, your brand, and your core product. If it isn’t in writing, it isn’t protected.
Do your diligence on them. They’ll spend months examining your company. Return the favor. Call the founders of their past portfolio companies, especially the ones that were sold or struggled. Ask what happened after the money arrived. The research says the firm matters. Find out which kind of firm you’re talking to.
Be willing to walk away. This is the hardest part, and the most important. Finding the right partner means turning down a lot of money first. Every term sheet that doesn’t respect your vision is an offer to buy your purpose at a discount. Not every opportunity is yours, and the ability to say no is the most valuable leverage you’ll ever have at the negotiating table.
Choose Your Partner by Its Nature
The frog didn’t die because the scorpion was evil. It died because it believed a promise that ran against the scorpion’s nature. Founders make the same mistake when they trust a pitch deck about “partnership” and “shared vision” instead of the incentives and the documents.
So don’t ask private equity to be something it isn’t. Ask what it is, and decide whether that nature can serve your purpose on terms you set. Sometimes the answer is yes. Often it’s not yet. Either way, your company, your legacy, and the reason you built it in the first place are yours to protect.
At Spotlight, we help founders and creatives build companies around their purpose, then structure capital, legal, and financial decisions to serve it. If you’re weighing an investment offer, or want to be ready before one arrives, schedule an introductory call. I keep a few slots open each week, no pitch, just a conversation.
