10 Tips On Negotiating With VCs
Posted by Pierre de la Fortune on August 31, 2015 @ 12:01 a.m.
Written by Furqan Nazeeri
First, congratulations, you are now in a *very* select group of startups. Having been on both sides of the table, here is my list of tips for entrepreneurs negotiating with VCs:
10. Relax. If youíve gotten a VC to the table and they are negotiating terms, then the hook is set (they donít [usually] do this lightly). Itís possible they could get away, but itís not likely. Now you can focus on reeling them inÖthatís something that takes time, focus and patience. There is no need to rush and from a negotiation point of view, you donít want to seem too eager. So even if you are a few weeks from missing payroll, you want to come across as casual and as indifferent as your nerves will allow.
9. Start ďreverse due diligenceĒ now. I wrote a post on how to do this a while ago. There is real and perceived value in shifting the conversation away from ďwhy should the VC invest in your company?Ē to ďwhy should you take their money?Ē If you have more than one option, reverse diligence becomes even more important, but even in the scenario where there is only one offer you still want to make sure youíre not walking into an hornetís nest. So if you havenít started this already, get crackiní now.
8. Use your attorney to help with thorny and low-level issues. You should be consulting with your attorney frequently during the process, and on certain issues youíll want to use your attorney as an agent (who will talk to their attorney). This extra channel can be useful for low-level issues that come up in every deal as well as on particularly thorny issues. That said, donít over-rely on this channel because at $800 per hour combined (remember you pay for both sides), legal fees can add up in a hurry.
7. Do your homework. Particularly if this is your first raise. Make sure you know as much about the terms youíll be negotiating and their relative importance. Also, note that there is some subjectivity to this process so itís worth building your own decision matrix. Read Venture Hacks. Go on TheFunded and check out all the actual term sheets they have there. Make sure you understand how the economics of a venture investment work such as liquidation preferences and dividends.
6. Be clear you are not the final authority. Even if you are, tell the VCs that someone else is the final decider. This technique is used quite often by car salesmen as well as VCs themselves. You know how they say, ďlet me talk to my partnersĒ or ďlet me see what the boss says.Ē You can respond with things like, ďI really want to work with youÖcan you give me something to work with on [some particular term] so that I can convince [my partners, board, other investors, etc.] to go with you?Ē At certain points in the negotiation (particularly near the end) you will want to avoid this so donít over use it. As the deal solidifies you can offer (provided itís true) things like, ďI have authority to offer X, Y and Z. Can you accept that?Ē
Donít over play this card because you also have to be careful to make sure that investors (your existing or the potential new ones) donít go around you. In so far as possible, you want to keep your existing investors and potential investors from talking directly. This is sometimes hard to do, but itís worth trying. Itís not just collusion that is a problem, itís also can be confusing and risks blowing up a deal (or getting worse terms) if there are uncontrolled back channels.
5. Be honest. And be as forthright as possible. I know some will tell you that VCs are the ďenemyĒ and they will screw you over at the flip of a hat so you shouldnít have any compunction about returning the favor. There are some VCs out there like that, but certainly not all. Iíve had the pain and pleasure of working with both types and can report that honesty and candor is the way to go. For example, if this is your first time raising money, you should state up front that. Tell them that you will negotiate in good faith, but that it is possible (likely?) there are details you are not familiar with which youíll have to come back and renegotiate and that you ask for patience in advance. I love that Scarface quote where Tony Montana says, ďI never fucked anybody over in my life didnít have it coming to them. You got that? All I have in this world is my balls and my word and I donít break them for no one.Ē Not bad words to live by.
4. Negotiate by email, phone or face-to-face (in that order of preference). I recommend negotiating by phone or ideally via email. In-person negotiations are tough. Remember that VCs negotiate terms on a weekly basis. They know these things inside and out. While you have to go ďcrank the spreadsheetĒ they intuitively know the results of a tweak to a term from comparison to other deals theyíve done or seen their partners do. Often times you wonít even know the meaning of a term and it hurts your position if you have to ask for an education. If you negotiate asynchronously you can always Google something or call an adviser. Also, if youíre doing a face-to-face that means you are limiting your negotiating options (hopefully you have multiple interested parties and you want to keep negotiating with them all simultaneously until the very end).
3. Control the documentation process. If there are multiple investors in the round, ask (demand?) that investors use one counsel. If they insist on having multiple investor counsels, you should tell them that youíre ďonly paying for one.Ē Besides the ďtwo- or three-on-oneĒ structure this also runs up the cost and consumes a lot more time. Most investors will agree to use the lead investorís counsel and do any additional legal review by their own counsel on their own nickel and time. As a side note, Iíve noticed that the funds that use SBIC money have special issues that makes them want their own counsel. Since the SBA terminated this program this should be a less frequent issue, but in case you come across it Iíd push back doubly hard (itís not your problem they had to beg for government money!).
Another point to push for is to have company counsel prepare the first drafts of the documents. The documents these days are pretty standard, but I still believe that ďfacts on the groundĒ play a part in negotiation psychology. Unless you have particular leverage, you should instruct counsel to draft a ďdown the middle of the fairwayĒ set of documents and this may help you in the margins.
2. Negotiate ďcompleteĒ offers. Some people like to negotiate one term at a time and go back and re-open previously agreed terms while negotiating new ones. I personally find this style distasteful, although Iíve found it works well in a one-off transaction if you have the stomach for it (which I donít). So instead of negotiating each term individually, ask for (and give) complete offers on all of the key terms. Itís a much easier and product method. If someone asks you how you feel about a ďvaluation of $15MMĒ the answer could be ďgreatĒ if the other terms or reasonable or ďthat sucksĒ if not.
1. Get in a legitimate fight. At some point in the negotiation (ideally toward the end) pick a fight on some topic that you can make a real argument for. Donít be rude, but be firm. The reason is two-fold. First, you want to test how your prospective partner argues; do they fight dirty, aggressive, passive aggressive or something else? Second, you want to leave them with the impression that you are an aggressive advocate for you, your shareholders and your business.
And since I canít count, hereís a ďbonusĒ tip:
0. Donít say ďnoĒ say ďnot nowĒ when turning down alternate investors. Even when you sign a term sheet (or close on a round for that matter) you still want to keep the alternate investors loosely engaged. You never know when you might need to re-engage them.
For more info please visit: http://altgate.com/blog/2008/08/10-tips-on-negotiating-with-vcs.html
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