January 21, 2011
How to Negotiate With Venture Capitalists
At the time that a venture capital firm has made an investment decision, you will find that there are some very critical issues that need to be addressed to ensure the relationship between investee and investor remains good.
Download the Capital Raising Blueprint Materials and Get ready to grow your business<==== Valuation: This is perhaps the most important issue that needs to be negotiated with venture capitalists. This is the determination that provides the valuation for your company. This is what an investor will pay for a percentage of your startup costs. It works in your favor to give a smaller percentage for a higher dollar amount. Timing. To help reduce the risk of their investment, many of the venture capitalist will provide their funding in a number of stages. These installments will occur when certain operating landmarks are met.
Stock Issuance Timing. There are times when it might be preferable to the investors to see that stock ownerships occur in waves.
Company Management. Venture capitalists will put their investments into people as much as companies. In many cases, they will mandate that particular people are placed in key positions or that you hire a particular style of person at certain points. This is typically a good thing since these individuals are often very knowledgeable and capable of making sound decisions. It may however dilute the holdings and compensation from stock options in the process.
Employment Limitations. You will find that venture capitalists will hate clauses where certain people cannot be fired and compensation levels are far too high. These investors might also require a non-compete agreement when your employment ends at this particular location.
Proprietary Rights. It is important to note that these individuals are mostly looking to invest in technologies. This means that want to ensure that the technologies has been bound by law to the company that they are providing funding for. If they belong to an individual, there is too much of a risk that the investment can move around. This means the innovation must remain with the company and they may require confidentiality agreements as well.
Lock-up period. One very common piece of negotiations will be the lock-up period. This is the time they have to do their due diligence on the company that they will be investing in. Typically it is 30 – 60 days.
Liquidity Events. Probably the most important piece of an investment will be how the investor will exit from it. How will they get their money back, will there be a return with this at some point in the future. This normally happens with a liquidity event which is an acquisition or an offering of public stock. This issue will deal with registration rights, rights to sell stock as well as forced redemption of stock. It is important that you check with a lawyer to verify that you are entering into a fair set of terms.
Click here to find out how you can raise Capital for your business <==== The end results of your negotiations will deal with these issues and further impact the future of the firm or entrepreneur that receives venture funding. It is important that an entrepreneur seeks out services from professional advisors to aid them in this process.
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