"negotiations" part 5.2 of the series six steps to venture capital

the negotiation process is key for a good contract. in "negotiations" part 5.1 of the series "six steps to venture capital" the general framework got laid out. in part 5.2 it is all about the details.

key points first

time line, term sheet, contract. in that order. never avoid any critical topic at the beginning. they will sooner or later surface anyway, so they shall be dealt with directly.

know the aims
it is vital to know the aims of the negotiations before they take place. the negotiation team has to decide beforehand what they aim for and how much compromise is acceptable.
one way to do that is to sit down for half an hour, discuss, decide and write down the aims to visualize and remember. then destroy the paper, as it must not be seen by the vc by any accident in the meeting afterwords. this holds for each separate meeting. no-one alone compromises the agreed terms in face of the investor. if a rethinking of the agreed aims is necessary, a break out session is necessary.

break out sessions
they are a common way to take speed or emotion out of tense negotiations. every party gets time to rethink, to cool down or to gather required information. start.ups can co-ordinate their negotiation aims. whenever necessary break-out. rather one break out session too much than having agreed to anything without realizing what it means. having experts on stand-by is recommended.

experts on stand-by
lawyers, technical experts, general advisers or friends are source for support during negotiations. they are to be informed ahead so they can be reached when required.



know the terms
drag along, take along, liquidation preference, right of first refusal, pre-post money valuation, milestones, catch-up, pay to play, ratchet, signing-closing, advisory board, due-diligence,... they all can be looked up. e.g. on investopedia or wikipedia. this is investment language, nothing really complicated about. one just has to be able to deal with them, know them by heart and be able to „play“ - meaning negotiate on the different aspects - them.

tiredness
bad negotiation results can not be excused with tiredness. if necessary take break outs, get food, go scream on the balcony - whatever is necessary. then get back and keep negotiating hard.

socialize
vc are (also) humans. they have hobbies, family, worries, hopes. they are like everyone else. avoid the hawks through checking their references (discussed here).

heart & hard
being respectful and friendly is key. negotiating hard at the same time is no contradiction. not only for the negotiations and the daily life after with vc. it also holds for customers, suppliers, sales partners or employees.
at the end of a long negotiation process both parties are supposed to be unhappy with the results - but still happy to have closed the deal. with the negotiations finalized and vc money injected it is all about fulfilling and surviving. more on why it is necessary to deliver in the upcoming sixth and final part of „six steps to venture capital“.


recommendations: 1) define aims: time line & term sheet key elements, 2) take break outs, 3) have experts on stand-by and 4) know the terms.

in the final part of the series six step to venture capital read on how to survive after the investment. clearly not a trivial task.

"approaching venture capitalists", part 4.1 of the series six steps to venture capital

„giving and taking“ is the name of the game now. start.ups have bright ideas but no money, investors have, well, money and the need to earn profits. so both parties have a mutual interest to find to each other. therefore mutual respect should be the basis of the interaction on both sides.

this is the 4th 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 and the battleground got prepared in step 3 now it is time to approach the potential investors.

first thing to do is to contact three venture capitalists from the b-list (as laid out in part 3).

the best way to contact is through references (see here on general discussion of references in the context of venture capital). if that is not possible, it is worth to investigate on how to get in touch best with the respective firms. there has been an interesting discussion on that topic also at web2.0 berlin 2009, see here.

in case of doubt, just call the vc firm and ask which way of contact they prefer. when calling though, be prepared for the (unlikely) event, that you get put through directly to a vc partner or his associate. in this case, either just ask how to forward your project or use the opportunity to try the already prepared (and peer group tested!) 2 minute telephone pitch. depending on the latter, the executive summary could be looked with more or less care at the first screening.

having found out the way to contact, send the executive summary and announce to get in touch personally one week after.

follow up after one week as said. use whatever way fits best, e.g. by using an open approach like, „any questions, additional information wanted“. key is to find out if they interested or not. it is not worth to run after a vc for 2 month. reading the executive summary takes 10 minutes.
2nd thing to find out is how to set up the next step. be it a personal meeting or a online presentation/telephone conference. know how the time frame for meeting will be and who will attend.

when succeeding to get the 1st meeting/online presentation prepare the team: ceo and cfo are sufficient. prepare the pitch and stick to the time frame. decide who answers on which questions beforehand.
also the start.up has to have the questions to the investors prepared. a start.up which has no questions to the vc did not prepare.

at the end it is all about fixing the next steps. when - if not directly - to get an answer for go/no-go and about discussing the timeline for a follow up meeting.

if an invitation for a 2nd round discussion got nailed down, it is a ll about making it to the 3rd found. the basic idea is the same as for the first encounter. ahead of the talk, fix time frame, fix topics, check on participants (investor, start.up). additionally prepare references, have the non disclosure agreement (nda) cleared out in the meantime (so that legal stuff does not waste scare meeting time and legal topics potentially poison the spirit, long story short, that often leads to accept the nda of the vc).

handling the 2nd round meeting comes up at the second part of "approaching venture capitalists", part 4.2 of the series six steps to venture capital.

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