Dienstag, 3. März 2009

"negotiations" part 5.1 of the series six steps to venture capital

finding the right vc is difficult. getting a good investment deal is worse. though with the right preparation, much can be done to achieve a result, which is mutually favorable.

this is the 5th part of the "six steps to venture capital" guide, where the systematic approach to acquire venture capital for a start.ups is discussed. after the motivation got sorted out in step 1, the a-b list of potential investors in part 2 (part 1, part 2) got filled. the battleground got prepared in step3. now it is all about bringing home the money.

experienced investors will take advantage of unprepared start.ups. therefore key topics have to be covered before going into the actual negotiations. to know more about strategy and preparation, see sun zi, moltke and douglas adams for start.ups. basically every contact with the vc can be considered as part of a negotiation process.

time line - term sheet - contract signing & closing are the cornerstones of vc- negotiations. after the 2nd meeting the vc should have figured out the idea, market, business model, competition, exit channels and team - the investment story of the start.up. that done, it is all about nailing down a deal. that´s the same for the potential investor as for the start.up.

time line
the time line outlines the time frame from the beginning of the negotiations until the money flows. agreeing on the time line is rather non controversial and allows to get know to each other. simple does not mean irrelevant. by committing to a time line (especially) the vc has to reserve resources, meaning money.

term sheet
next thing is the term sheet. using common (non lawyer) language, all the important topics of the investment get outlined in it. it is basically a multi-page text document which both parties sign. example see here. whatever key topic relevant to the start.up or vc has to be part of the term sheet.
struggling for compromise is part of this process. moving key topics to be solved „afterwards“ or through proposals of lawyers in the final contract often leads to late break ups. thus involving high lawyer bills and wasting weeks of negotiations. typical time line to reach a term sheet is four to eight weeks. every party covers their own costs. granted that the negotiations were successful, it´s then about fixing a contract.

the final contract gets drafted on the basis of the term sheet. it should merely be a reformulation in lawyer-language. a common lawyer between the vc and the investee reduces costs. based on a well negotiated term sheet, it rarely leads to a break-down of the investment process. the paperwork can produce contracts between 35 to 100 pages.

the costs are typically covered by the start.up after the investor injected money. a maximal allowance for the cost should already be settled in the term sheet, anywhere around thirty thousand dollars/euros. anything above is to be covered by the respective parties.
time line for the contract should be four weeks. two weeks for signing and another two to four weeks for closing finalize the process.

giving the general line (term sheet - contract signing & closing), there are some topics which deserve an in depth coverage, like knowing the terms, break-outs or tiredness.
this will be covered int the upcoming part two on "negotiations" of the series "six steps to venture capital"

linktip: for the MIT 100k participants: executive summaries