Venture Capital Negotiating Skills
When firms enter into negotiations with venture capital firms, there are many issues which need to be outlined and agreed on. This tract describes the main concerns.
Valuation. Valuation is the most outstanding negotiating issues. Valuation is the cost of the company in which the venture capitalist invests. Valuation determines what % of the company the financier is buying for their capital.
Timing of the Investment. Many investors will commit an enormous amount of capital, but will contribute that capital to the corporations in payments. Regularly these installments are only made when pre-designated landmarks are met.
Vesting of Founders ‘ Stock. Like capital, speculators regularly prefer that stock is given to company founders and key employees in installments. This is sometimes known as vesting.
Modifying the Managing Team. Some backers demand that additional or substitute management employees be employed successive to their investment. This gives investors additional security that the company will execute on its business structure. A crucial issue to agree terms with regards to modifying the managing team is the amount of stock or options that will be given to new managing team members, as this could dilute the holdings of the founders.
Work Agreements with Key Founders. Venture capitalists typically don't want companies to have work agreements that limit the circumstances under which workers can be fired and/or set compensation and benefits levels that are too high. Other key employment agreement issues to be bartered with investors include restrictions on post-employment activities and worker severance payments on termination.
Company Proprietary Rights. If the Corporation has a vital product with intellectual property (IP), investors will want to ensure that the company, and not a company worker, owns the IP. Additionally, backers will want to make certain that new inventions be assigned to the company. To that end, investors may barter that all employees must sign Confidentiality and Inventions Assignment Agreements.
Exit System. Investors are very concentrated on how they will “cash out” of their investment. In that regard, they'll negotiate relating to registration rights (both demand and piggyback); rights to participate in any sale of stock by the founders (co-sale rights); and most likely a right to force the company to redeem their stock in certain circumstances.
Lock-Up Rights. Venture capitalists may need a lock-up period at the term sheet stage. The “lock-up period” is typically a 30-60 day period where the investors have the exclusive right, but not the obligation, to make the investment. Investors typically conduct required groundwork during this time without fear that other stockholders will pre-empt their opportunity to invest in the company.
Each one of these issues are critical when raising venture capital, since the result can noticeably impact the successfulness of the venture and the wealth potential of the company founders and managing team. Because investors are very well informed regarding these issues, and have great ability in negotiating on them, corporations who are raising venture capital should seek advisors who also have this experience and experience.
John has over 40 years of experience in business promoting sales engineering general management online real-estate planning. He has worked for and with worldwide corporations such as IBM Electronic Data Systems and Mahindra British Telecomms. John has a BS from Brown in PC Science an MA through IBM in Industrial Electronics as well as a PhD in International Trade and Management from the London College of Business.
