An Inside Look Into A VC Negotiation
TechCrunch sheds some light on how a VC deal is negotiated. The terms that come up during the discussion and the various valuation related issues that arise are often a great mystery to many entrepreneurs and founders.
In this article an entrepreneur and investor, Auren Hoffman, and another investor, Alex Rosen look at perspectives from both sides of the table, the dynamics and the terms discussed, and what ends up being negotiated.
Even after thousands of published articles about venture trends, hundreds of public pitch decks and numerous investor-penned “why we backed X company” memos, the actual negotiation of venture rounds remains unnecessarily murky. First-time entrepreneurs who have never fundraised are often at a loss for mapping the business values they hold to specific terms during a negotiation. Moreover, many wonder what terms even come up for discussion and why VCs and entrepreneurs may care about a particular term, but barely mention another.
The background is that Auren was looking for an “untraditional Series A investment structure” and knew that Alex’s company Ridge Ventures “had a reputation for flexibility” (a bit of a plug there? The cynic may see a message – “All you founders who think VCs should be flexible … should be approaching Ridge Ventures!”)
For an article that aims to explain the basics and the terminology they launch straight into talking about “term sheets” without bothering to explain what a term sheet is when it’s at home.
That said, the article does have some useful tips if you read between the lines and don’t get hung up on all the specifics around this particular company’s requirements and circumstances. Given that this company already had paying customers and had other factors likely to tick boxes with investors, it’s difficult to see how some of the lessons here can be useful to the wider world of founders seeking VC investment.
The article is available here.
In a different piece on negotiation (general negotiation, not specific to VC deals), wealth management company Maxwell, Locke & Ritter offer 12 great tips:
1. Define what a win looks like to you. For a transaction to make sense for …
2. Establish ground rules. In many cases, it’s a good idea to…
3. Determine value. Think in terms of basic interests on both sides. Decide ahead of time what is …
4. Hold back. Don’t make the first move. You don’t know what the other party’s aspirations are and you may give away far more than you need to. And when the other party…
Other articles on VC funding and impressing investors:
The Founders Guide To Selling Your Company
How To Impress Investors To Invest In Your Business
Key Issues In Negotiating M&A Agreements