October 13, 2016 | 5-minute read (813 words)
You’ve done the bootstrapping. You approached all the friends and family you could for investment capital. Maybe you have even tried crowdsourcing.
Now your company is ready for the next step. You are just a cash infusion away from dynamically growing, so you set up the next leg. A meeting with a venture capitalist.
So there you are waiting. Your meeting is next, moments away from what is most likely the biggest defining moment for your company and all you have put into it. This is also the beginning of all you still want to do with it.
With all of that on your mind, are you ready to negotiate? Do you have a structure to what to ask for and expect?
Before you have that meeting with a venture capital firm, take a moment to integrate these ideas. They will help make negotiating a lot easier or at least give you an outline of what happens next.
Start by understanding your leverage. By that I mean how many of the competitors of this firm are you talking with as well at this time?
You can bet that VCs are seeing and hearing pitches all the time. Set yourself up to approach like an equal by making sure you are not pinning it all on one exchange.
If you are setting up single appointments, then you are missing a key point.
The pursuit is best balanced when you are someone who is taking several meetings all across the board. Build your network of possible investors and fund managers, know who and one what sectors they intersect and place yourself in the middle of where you have the most to offer.
The best way to stand out is to have firms with common interest discussing you. Don’t book just one at a time - synchronize your meetings as much as possible.
Another key part of negotiating is make sure you perform your due diligence. Whenever possible, meet with the heads of companies who previously met with the VC you’re interested in. You can learn a lot about what a particular investor favors, based on any offers they've given to the founders you speak with. This will help you prepare for what kind of term sheet to look for.
Meet with the firms who didn’t sign on too, keep an ear out for what the deal-breakers may have been for either side previously.
Another key part of negotiating is how honest and trustworthy can you be?
VC’s know that if you’re setting up meetings, you have lofty expectations and a good pitch - but are there any key issues down the road that they should know about? Maybe it’s a key member who may be looking to leave soon or a supplier that you have concerns around should demand spike.
Keep in mind most of them are expecting that shoe drop call from all new signees at some point after the deal is done. If you can be real and open beforehand as part of the process the respect that can garner goes a long way.
Lastly, and this will sound counterintuitive, remember this: The whole deal is what is on the table, not just the money.
Too often in negotiating people can get hooked on a number as a goal, especially as we watch our peers and competitors appear in the listings. The monetary valuation is one piece, never forget to look into and discuss tangibly how can the VC connect you to the places you couldn’t reach on your own? What international opportunities can they expedite? What key pipelines can be built through their involvement?
Taking on a VC investment is about much more than money, they have the ability to provide mentoring, strategic consultation and often years of cultivated political capital. Let them feel their full worth is valued and don’t cheat yourself of recognizing that as an asset.
If you discount that and focus on the best payout you still may win their investment in you, but they will be less emotionally invested and less willing to do more than treat you like an end goal. You will be seen as a number to be recouped rather than a partner to be grown and nurtured.
Overall build a dialogue invested in cooperation and mutual benefit; from there negotiation becomes less adversarial and more what it should be, a rich partnership that is beneficial for all.
About Early Growth:
Early Growth is the largest national provider of outsourced CFO & accounting services in the venture capital space. For over 10 years, Early Growth has been providing finance & accounting, tax, equity management, and fund accounting services to startups at all stages. Early Growth is a strategic partner handling your finances so you can focus on your business, customers, and team.