August 21, 2012
How to Negotiate With Venture Capitalists
Negotiation Methodology for Venture Capitalists
MOtivated by vast profits, venture capitalists are looking for a big take-home in a short time. Seeking to double, to triple, or even to quadruple their initial investment in as little as five to seven years, they will do whatever it takes to get the biggest ROI possible when they offer a stock purchase agreement or a term sheet.
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By no means are we saying that venture capitalists are vipers who would take the life from your company. In many ways they are your allies, helping you to make your business grow as rapidly as possible while making a great deal of money themselves. Both you and they are motivated by profit. They typically will not take your incentive to move ahead. What they will do, however, is to offer a nonbinding agreement that will state the terms of the ownership of the company and the power to negotiate has effectively, at that point, shifted from you to them. There is what the control of valuation, of board control, liquidation and many other factors are stated clearly and concisely.
That being said, celebrate the receiving of your term sheet very cautiously. It may mean that the venture capitalist is quite earnest in their desire to invest in your company. That sheet is the first step in the process of negotiation. At this point, it will be necessary for you to have an attorney to help you to navigate the process. When you remain ignorant of the process and do not hire an advocate, it is a liability to you. An attorney can help you to review all of the details which have been laid out, and to communicate with the venture capitalists to find a final agreement which will be laid out and finalized. This will be–in the long range, very beneficial to you and your company.
The best way to ensure that the process is to your benefit is, as in any other purchase or service, to secure more than one term sheet from several different companies or firms. You will want to contact each of these companies within a single week or a bit more in order to create an aura of competition. In your emails or correspondence with the venture capitalist firms, ensure that you let them know that you are be looking to close your funding request within a given span of time, or by a certain date, and that you are seeking a specific amount of money. This may help you to give the impression that urgency is needed if they want to be part of your future. Since you are a single entity and there are multiple firms competing for your business, the perception of your value is increased.It will also serve to level things out when any Venture capitalist company seeks to lock you into a no shopping term sheet, which may prevent you from shopping with other investors while they try to decide whether to fund your business. If you have already done so, there is no need for you to be shopping around further.
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Seeking out and securing more than one term sheet can make the process of negotiation much simpler by stopping many problems before they start. You are creating a market which is favoring you, the seller, as opposed to that of the venture capitalist, which will end up with you receiving more favorable terms in the stock purchase agreement in most instances.
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