Startup CEO: A Field Guide to Scaling Up Your Business, + Website by Blumberg Matt

Author:Blumberg, Matt [Blumberg, Matt]
Language: eng
Format: azw3
Publisher: Wiley
Published: 2013-08-14T04:00:00+00:00

THE TOP 11 TAKEAWAYS FOR FINANCING NEGOTIATIONS

The most important part of the venture financing process is negotiating the term sheet. Although they’re only two to three pages long, term sheets contain summaries of all the critical aspects of a financing and once they’re signed, the remainder of the financing process is significantly more automatic.

For the real meat on term sheets, see Brad Feld and Jason Mendelson’s Venture Deals, with my contributions on “The Entrepreneur’s Perspective.”

Based on the financings I’ve seen and worked on—both as a VC many years ago and as an entrepreneur and board member—my top 11 biggest takeaways for entrepreneurs are as follows:

1. Get a good lawyer. I mean a really good one. Not just one whom you are comfortable with and who is productive and doesn’t charge you too much (as Brad and Jason say in Venture Deals, “your wife’s brother’s friend’s neighbor”) but one who knows venture financings like the back of his or her hand. No matter how many deals you have worked on, your lawyer has worked on more of them.

2. Focus on terms that matter, otherwise known as “pick your battles.” A typical VC term sheet will have at least 20 terms spelled out in it. There are only a few that really matter in the end, although you should at least make sure your lawyer is comfortable that the others are reasonable and somewhat standard. Spend time on valuation, the type of security, the option pool, board composition, and your own compensation and rights.

3. Sacrifice valuation for a clean security. Everyone always thinks that price/valuation is the most important thing to maximize in a deal. However, the structure of the security can be much more important in the long run. Whether the VCs buy 33 percent of your company or 30 percent of your company is much less important than having a capital structure that’s easy for an outsider to understand and want to join (e.g., investment banker or later-stage VC).

4. Always have a BATNA (a fancy way of saying Plan B). This is probably the most important piece of advice I can offer. This is true of any negotiation, not just a term sheet (see the sidebar at the end of this chapter).

5. Be prepared to pay up for high-quality investors. There is a world of difference between good VCs and bad VCs (both the individual partners and the firms) that will ultimately have a lot to do with how successful your company can become. The quality of your VC isn’t more important than the quality of your product or your team but it’s right up there. But—and this is an important but—you should expect to pay for quality in the form of slightly weaker terms (whether valuation or type of security). This is where having a BATNA really comes in handy.

6. Ask for references. Don’t be shy: prospective VCs are checking up on you and you have every right to do the same with them. Ask them for references of CEOs they’ve worked with.

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