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| NEN asked its VC Experts to share the secrets of a "good deal" - from the entrepreneur's perspective. They were surprisingly candid: the key is to look beyond valuation - beyond the share price that the VC is offering. |
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 My advice to entrepreneurs? May be I shouldn't be telling them because it will become harder for me to negotiate…
But you know the negotiation will be around valuation.
So as an investor, I will put up 10 points, all of which are important to me. And if the entrepreneur is only thinking: 'valuation, valuation, valuation', I will make sure I will get nine in my favor and then give a little bit on valuation. So a smart entrepreneur needs to realize that negotiation is actually a package deal of all these 10 terms.
The important terms?
Things like what is the instrument in which the VC is investing - almost always preferred stock; what are the rights of that preferred stock; what are the things that the entrepreneur will have to seek the VC's permission to do; the size of the option pool; the conditions under which the entrepreneur and the VC can fire each other: What happens if new money has to be raised? What happens if the entrepreneur wants to sell out? What happens if the VC wants to sell out? All of these are extremely critical.
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 Say there are three VCs who are interested - you obviously look at which VC gives you the maximum amount of money for your company's shares, and you go with him. And that is how deals are generally done.
But from an entrepreneur's perspective, it is important to know the expectations of that VC: what are the terms he has put in, that could hurt the entrepreneur three to four years down the line?
For example, there could be performance expectations. One VC could say: I will give you x valuation. And another one could say: I will give you 3x valuation, but you have to perform 2x. And if you don't perform, maybe he will make your life difficult, and maybe take away some of your ownership.
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 It's not just money; it's way beyond that. Choosing a partner is much more critical, in my view, than focusing on whether I can get an exact term.
If the business does well, you are going to make enough money. You are going to make enough money that you don't care beyond that; the terms won't matter so much. The key is to have the right partner.
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Obviously don’t be stupid.
I would never ask somebody to take more than 25% below what they could get from somewhere else. But at the same time, don't just look to get the highest price for your company, focus more on working with the right people who can help you grow a business. That would be my advice.
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| NEN: Do VC's overpay for their companies sometimes? Do you ever get swept up in competing for deals? |
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Maintaining discipline is an elusive goal. It is especially hard for first time VCs to keep exercising that discipline. Booms and busts happen because sentiments fly.
But I think there is another important element: all partners must agree before a deal is done. Hopefully if I am not exercising restraint and discipline, my partners will.
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| NOTE: Some of the comments may have been edited for clarity, without changing emphasis or meaning. |
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AdditionaL Resources
