Funding Negotiation

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Show me the money

How to get the deal you deserve

You've identified the VCs you want to work with, you've pitched to them, and you've sent over every single document that your company owns.

By now, you should (hopefully) have at least two term sheets in front of you.

The next difficult choice? No, it's not what you want to eat for lunch, although burgers sound good to me right now. Go with that.

It's which deal you want to go with.

When your business idea is good enough to warrant multiple term sheets, you need to assess the deals and evaluate the investors.

It's like that Meryl Streep film where she has to make a critical, life-changing decision... What was it called?

Mamma Mia, that's the one.

Right, let's look at those term sheets and make some choices.

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It's dangerous to go alone… Take a lawyer

You definitely need a second opinion when it comes to choosing the right deal, especially if it's your first time going for A+ funding.

A lawyer that specialises in term sheets and fundraising is a solid bet; alternatively, a friend who has been through the funding process already. You can even ask your board for their thoughts.

After all, most things in life are better done with company.

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Don't just go for the best valuation

While the valuation you receive is important, you need to read the whole document and see what the terms are.

Many term sheets will include covenants, which state what you must do and must not do to keep your investor happy. While some of these covenants are sensible, some might cause issues. For example, if your investor wants to approve any new hires you make or contracts you sign, that will slow you down.

The good news is that the term sheet isn't legally binding. There is scope for negotiation before you sign that all-important contract. We'll look at this in more detail later.

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Consider the investor you're partnering with

You don't have to be best buddies with the VC company and the partner who'll be overseeing your investment. However, you'll want to ensure you're at least on the same wavelength.

When considering the VC organisations that want to work with you, take the following into account:

• What experience do they have?

• What is their portfolio like?

• Are they local to you? Do they operate in the same time zone?

• Are they big or small? Smaller VCs are often faster and more flexible

• How quickly do decisions get made?

• What is their reputation in the wider market?

• What is their negotiating style like? This will help you later on

• How good is their investment track record?

• What support and connections do they offer?

• How important will you be to them? You want to be a priority for sure, but not so much that your every move will be scrutinised

Don't be afraid to ask questions – the due diligence process is as much for you as for them.

It's often good to find another company in the VCs portfolio and take them for coffee. While their experience might not be the same as yours would be, especially if you are in different industries, it can help you get an objective opinion.

When considering the partner, ask the following questions:

• How do they fit into the VC firm?

• What is their industry experience? Have they chaired a board or founded their own company?

• What is their working style like? Are they more hands-on, or are they happy for you to get on with things?

• How do they react when things go wrong?

• Consider the airport test – would you be happy to be stuck on a plane with them? Meeting with them for drinks or a meal can be an excellent way to answer this question

Check out their blogs and social media profiles too. This can give you an interesting insight into not just who they are in business, but what they're like outside of working hours.

This partner will become part of your board and stay there until the investor exits your business – so it's critical to make the right choice.

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Don't be afraid to negotiate

Negotiation strategies have been done to death on the interwebs, so I won't go into too much detail here.

When you're going for A/B/C funding, the negotiation process is relatively simple. The key is collaboration – you want to make sure any deal benefits both parties. Be transparent, leave your emotions at the door and be authentic, and you can't go wrong.

Multiple term sheets can work to your advantage. If you time things right and don't overplay your hand, you can use term sheets from competing VCs to trigger action and get an improved deal. Pacing is critical here, so always be thinking two steps ahead.

(By the way, while I have your attention, never fake or exaggerate alternative offers. VCs are well connected, and a few phone calls will prove that you're not to be trusted. You'd be surprised how many businesses think this is okay.)

Having a lawyer really helps here – they'll guide you through the process and help put a negotiation package together that your VC can get on board with. Not got a lawyer yet? Get one. Seriously. I'll wait.

I've been fortunate to have seen some of the industry's best deal-makers at work. I've seen some of the worst too, but that's an article for another day.

Here are some of my top tips for negotiating successfully.

• Never offer a draft term sheet or valuation offer to a VC – this puts a ceiling on your prices and terms and gives them the advantage. If they're pressing you for a figure, provide a broader range instead

• Focus on the things that matter. In my experience, the five things that should be a top priority are valuation, stock option pool, liquidation preferences, board seats and voting rights. Prioritise these, and you can get the negotiation closed sooner

• Know what your VC wants from the deal. This can give you leverage when it comes to negotiating other points. Bear in mind that they might ask you the same question, which provides them with leverage too!

• Know your plan B - this is often referred to as a BATNA or Best Alternative to Negotiated Agreement. This will help you understand your boundaries and what you're willing to concede on

• Be careful about walking away from a negotiation – this is only something you can do once. Before you do, share your logic with the VC so they can potentially reconsider your position

• Build a completion schedule for both you and the VC. This lets you set goals and deadlines and creates a sense of urgency and momentum. After all, you don't want to be three months in, and nobody has budged on anything

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In summary: Compromise is a good thing

Many businesses think compromising is a sign of weakness, but it's not.

In my experience, scaleups and VCs that are willing to negotiate are more likely to have a stronger, more trusting relationship.

I can't believe I finished this set of playbooks on such a nice note. Ugh, I hope I'm not losing my touch.

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What's next?  Investibility... are you ready?

The next set of playbooks looks at the case for investment. How do you know when your business is ready to start fundraising? Let's take a look.

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