Tips For Negotiating With A Venture Capitalist
How do you get on the good side of a venture capitalist? It might not be as difficult as you think. You simply have to show them that you have a plan that will allow them to invest and get back out within seven years, while tripling or even quadrupling their initial investment. Don’t think you can do that? Then you may not have what they want.
If this sounds like a venture capitalist will just use you and then take your money and run, it is actually the direct opposite. A capitalist wants to work with people who are equally driven to grow a business and earn money. They aren’t taking their profits from you. They are taking their profits from the growth of the business, and you will also be earning money. Yet, you have to be wise when taking this type of partnership and agreeing to that term slip. You are essentially giving some control of your business over to someone else, so make sure to look into all factors including valuation, who has control of the board, and how liquidation will be carried out.
If your initial reaction to receiving a term sheet is to jump up and down, go ahead and do it. Just make sure to firmly put your feet back on the ground before you agree to the terms. You are essentially at square one of the stock negotiation process. Put your thinking cap on and stop celebrating long enough to hire a lawyer and go over every word in that term sheet. This is where you start negotiations and eventually settle on a fair stock purchase agreement. Once that agreement is reached, you are in business with t his investor, and that is a big deal.
While it is exciting to have one investor place value on your business, how would it feel to have five or even ten investors showing interest? You can create a competitive environment over this opportunity if you approach multiple venture capitalists around the same time. You can let them all know that on a certain date you will be closing a deal for a given amount of investment money. You give them the sense that you are that gem in the rough and you will not be available for long, so they better scoop you up while you’re available. Venture capitalists like to slap you with that “no shop” term sheet that says you cannot shop around to others, so you might as well shop around before that term sheet can be presented!
If you can get multiple investors to offer you a term sheet, you will have great leverage in negotiations for a favorable Stock Purchase Agreement. You have multiple offers and that is a threat to investors. They have to be fair or you simply go with someone else.
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