Benchmarks . . . 

are performance goals against which a company's success is measured. Agreed upon future benchmarks are frequently used by investors as conditions to the investors’ obligation to provide additional funding. Sometimes they are used to determine whether management will receive extra stock. Sometimes management will agree to issue more stock to its investors if the company does not meet its benchmarks, thus compensating the investor for the delay of his return.

Whatever purpose benchmarks serve in a financing arrangement, failure to arrive at one on schedule almost always punishes management in some way. As a result, management should be certain to negotiate conservative benchmarks. Whenever possible, they should be at a level that management, as well as the investor, thinks is achievable realistically. In that way, failure to achieve the benchmark is a true signal that something is wrong with the company or its plans.

For example, a benchmark could be stated as "the sale of at least 500 product units during a month before one year after the funding date." Failure to sell 500 product units in a month before that time would indicate to management and investors that the forecast was too optimistic, or that the sales department is not fully staffed.

As a rule, the financial projections contained in business plans make poor benchmarks because they are usually prepared long before unforeseen, but inevitable, problems arise. Since many business plans are prepared to attract investors, they tend to be optimistic in their assumptions. In fact, venture capitalists discount most company projections when they price a deal and do not really expect a company to meet all of the goals stated in their financial projections.

Nonetheless, business plan projections almost always provide a starting place for determining benchmarks. Some investors even try to impose benchmarks that are the same as the performance estimates contained in a company's projections. When this happens and the projections are not met, the unfortunate entrepreneur may find his investor released from future funding obligations, entitled to more company shares, or vested with greater control over company operations. To avoid these consequences, attempts to use business plan projections as benchmarks should be resisted vigorously, and conservative benchmarks should be used whenever possible. See: Projections, Stage Financing.