How to Negotiate With VCs: Everything You Need to Know
To understand how to negotiate with VCs, you need to understand the leverage you have, focus on value, and make sure both parties are on the same page.3 min read
2. Build Trust
3. Focus on Value Instead of Only Valuation
4. Things to Keep in Mind When Negotiating With a Venture Capitalist
To understand how to negotiate with VCs, or venture capitalists, you need to understand the leverage you have, create a good level of trust, focus on value, and make sure both parties are on the same page.
Understand Your Leverage
If an individual can gain a good understanding of their power in a business relationship, they can avoid ending up in situations that make them weak. When negotiators focus on the wrong aspects of a deal, they might quickly end up in bad situations that hurt their ability to get what they want.
Having desirable alternatives to your deal is an easy and simple way to give yourself an edge. When a startup, or business venture, is looking for venture capitalists to invest in the business, the more the better. If you have several backups to take the place of one deal, the other party knows that they could lose your interest if they don't agree to your terms. Appearing desperate is the worst position to have in a negotiation.
While it's good to have options and leverage, be careful about the amount of investments you take on. Sometimes, business owners can get a little too trusting in their vision for the company and not accurately assess their burn rate. If you run out of cash during the beginning of your business, you quickly lose leverage and value. When entrepreneurs give up too much equity right away and burn through their capital, they get stuck and may end up taking on a bad investor.
Another great way to obtain good leverage in a deal is by having a thorough understanding of the needs and interests of the other party involved in the negotiation. Ask yourself what they care about or hope for. Are there certain issues or aspects that worry them? If you know the other party well, you can know how to play to their interests.
When starting a relationship between your business and a venture capitalist, you must recognize that you're both looking at a potentially long-term business relationship. Being able to trust each other is important. VCs only want to associate with businesses that they trust and believe it, so be careful to show yourself and your business as stable and trustworthy.
If you're negotiating with a more vulnerable venture capitalist, be reliable and upstanding rather than using their weakness to take advantage of them. A trustworthy business relationship is a healthy one that can only help the business grow and succeed.
Focus on Value Instead of Only Valuation
Money is only one part of the negotiation puzzle. There are other aspects of an investor relationship that are valuable rather than just the monetary value of the business or shares. Many venture capitalists are not solely interested in shares and benefiting from the profits of a business. If you are seeking investors, you'll likely need to give up some control.
Business owners can end up in a tough position when trying to raise startup money. They need the money to run the business, but it comes at a cost. Usually, investors will agree to give a certain amount of money for a certain amount of control. A business owner will likely need to trade shareholder voting rights and other forms of influence in the company in return for cash.
Things to Keep in Mind When Negotiating With a Venture Capitalist
There are a few other tips to keep in mind as you negotiate with venture capitalists to try to grow your business. These include:
- Getting the most out of the terms and conditions of your agreement.
- Hiring an experienced business lawyer to help with negotiations.
- Keep track of preferred and common stock and their differences.
Some say that the terms of an investment contract aren't a big deal, but this attitude to easily lead to a bad agreement for the business. You want to make sure that the terms are in the best interest of your business before you sign. This is hard, especially if a venture capitalist is ready to invest a lot of money in your venture, but unfair terms can come back to bite you down the road.
If you need help with understanding how to negotiate with VCS, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.