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TAG: Terms

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Don't Accept Your First Offer

TheFunded.com Advice

Posted by Mr. Smith on 2008-04-28

Tags: Negotiation Terms Strategy

PUBLIC:

This advice is applicable in most negotiations, but it is particularly important to heed in venture capital: don't accept your first offer.

Venture capitalists are betting that they can pressure you to take the terms that they offer, and there are countless stories told by venture capitalists about how they duped CEOs with below-market valuations, excessive control provisions, and aggressive economic terms. I have heard venture capitalists laugh out loud when mentioning a company name and sat on a call where a VC actually whispered the pre-money valuation that was below $1 MM, referring to it as "unbelievable."

Practically speaking, why would any venture capitalist make you a good offer in the first pass of terms" If anything, they will make the lowest reasonable offer and then aggressively pressure you to take it with only minor changes. The good news is that, once a venture capitalist has decided to invest, you now have the negotiating leverage.

Members, read on for some very specific advice...

PRIVATE: Members Only (1979 Characters)

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You Don't Own What You Think: Percentages Lie

TheFunded.com Advice

Posted by EZ-stuff on 2008-04-21

Tags: Negotiation Terms Equity

PUBLIC:

You have a piece of paper or a spreadsheet that shows how much you own of your company, normally called a capitalization table. You may have common stock. You may have options. When you take a venture round, the capitalization table neither represents your ownership nor the allocation of shareholder value. Most of the terms that create the Preferred Stock for venture capitalists chip away at the value of common stock and options, so much so that, after a few rounds of investments, the value of common and options are largely worthless. Let's take a look at why and what can be done.

There are the obvious "big" preferred terms that eat away at shareholder value in most liquidity events, such as promising to re-pay the investment first through a "liquidation preference" and then allowing the venture investors to "participate" in the remaining value allocation. Another classic term is to place founder equity in escrow and force the founder to earn it back over years. Then, there are the slew of other terms that reallocate smaller chunks of value, such as cumulative dividends, redemption rights, ratchets, right of first refusals, and expense reimbursements. Finally, there are the many uncertain outcomes, such as allocating escrow to a preference waterfall, that force last minute negotiations where the preferred shareholders have control in many liquidity situations.

Here are some tips for a management team to retain value AND ownership through the process:

(1) Encourage competitive bidding among interested investors

(2) Raise more money than you need and limit the number of investment rounds to two

(3) Eliminate all secondary terms from term sheets and investment agreements

(4) Control a majority of the board under all circumstances

(5) Insist on executed employment contracts with equity and cash guarantees on liquidity

(6) Add mandatory preferred approval of liquidity offers at pre-defined prices

If other people have tips. add them below. It is about time that the capitlization table represents reality!

PRIVATE: Members Only

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VC Showing Disinterest After a Signed Term Sheet

TheFunded.com Discussion

Posted by Anonymous on 2008-04-18

Tags: Negotiation Rejection Terms Crisis

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Signed Term Sheet in Hand...What Do You Tell the Other VC Firms?

TheFunded.com Discussion

Posted by Anonymous on 2008-04-17

Tags: Negotiation Rejection Terms Crisis

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Share Your Experience of Outrageous Terms

TheFunded.com Discussion

Posted by Anonymous on 2008-03-28

Tags: Negotiation Terms

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Pre Emptive Round

TheFunded.com Discussion

Posted by Anonymous on 2008-03-25

Tags: Negotiation Terms Strategy

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Investor Wants Protection Against a Potential Future Down Round?

TheFunded.com Discussion

Posted by Anonymous on 2008-02-25

Tags: Negotiation Terms Anti-dillution

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Reduce or Eliminate Founder Vesting

TheFunded.com Advice

Posted by Mr Smith on 2008-02-22

Tags: Negotiation Terms Vesting

PUBLIC:

Most of term sheets added here have founder share vesting, but not mine. Here are a few good tips. First, you should negotiate hard on the number of years and the cliff. Nothing is "standard" with these deals. Second, try to get the VC to grant you "credit" for time served since company inception. Time served happens frequently with hot deals. Third, buy your initial shares with real money to justify your negotiating position. You are in a stronger position to reduce of eliminate the vesting if you have skin in the game.

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Liquidation Preferences (Preferred, Non Preferred)

TheFunded.com Advice

Posted by click on 2008-06-22

Tags: Negotiation Terms Liquidation Preferences

PUBLIC:

What are folks finding in their discussions for negotiating Participating vs. Non-Participating. ...

PRIVATE: Members Only

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Founder Selling Stock in Series B

TheFunded.com Discussion

Posted by Anonymous on 2008-02-03

Tags: Negotiation Terms Liquidity

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What is Full Participation?

TheFunded.com Discussion

Posted by Anonymous on 2008-02-01

Tags: Negotiation Terms Participation

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Taking Money Off the Table: Common V Pref Pricing

TheFunded.com Discussion

Posted by Anonymous on 2008-01-01

Tags: Closing Terms Liquidity

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Create a Common Term Sheet

TheFunded.com Discussion

Posted by Anonymous on 2007-12-16

Tags: Negotiation Terms

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Pari Passu

TheFunded.com Discussion

Posted by Anonymous on 2007-11-27

Tags: Negotiation Terms Pari Passu

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Participating Preferred

TheFunded.com Advice

Posted by anonymous on 2007-10-02

Tags: Negotiation Participation Terms

PUBLIC:

We are trying to close a Series C in the biotech space. Has anyone ever seen a 3X Participating Pf. "

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Investor's Right to Sell the Company?

TheFunded.com Discussion

Posted by Anonymous on 2007-10-03

Tags: Negotiation Terms

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The Term Sheet Shuffle

TheFunded.com Advice

Posted by Anonymous on 2007-06-22

Tags: Negotiation Terms

PUBLIC:

So, most VC's will draw out the period between initial diligence and offering a term sheet. It's just part of the game. Every day that goes by is another day to judge your success or failure. However, when you get your first term sheet from a lead, it normally has a cascading effect to get other funds that you are talking with to move, either to be a follow-on investor to the first lead or to issue their own terms.

Members, read on for some tips and tricks to get that first sheet...

PRIVATE: Members Only (1140 Characters)

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Industry Standard

TheFunded.com Advice

Posted by Anonymous on 2007-05-03

Tags: Negotiation Terms Lawyers

PUBLIC:

When you hear the comment that this term sheet / shareholder agreement is an industry standard you should be very cautious. There are no standards. The phrase means that there are clauses that even the VC feels a bit uncomfortable presenting (or don't think that you will approve them).

PRIVATE: Members Only (155 Characters)