VC Negotiation Fun

When we started SBT Venture Capital, we were excited about a future of identifying great companies – visionary teams with excellent products. And excited about the post-funding challenge of helping them grow to their full potential.

What we did not foresee was the huge amount of time spent on negotiating details, from term sheets to funding closing documents.

There are several schools of negotiating, and a classic book “Getting to YES” that taught us about BATNA “best alternative to a negotiated agreement”. Our BATNA is clear – move on to the next deal. Startup founders can define theirs…

About half of the startups we work with try to negotiate term sheets – even though our “standard” is pretty much aligned with the industry consensus. A large amount of time is spent on talking about “control” as embedded in the term sheet protective provisions – essentially a mechanism to protect a venture fund coming in with large amounts of cash but as a minority investor – from being diluted, or from company changing the business fundamentally. In a nutshell, if we give you money to build a cross-border remittances company, and we have 20% for our $3mill – you better build such a company and we have our 20% regardless. We hear all kind of arguments: our existing investors don’t like it (they put only $20k), our existing investors want the same protection (again, they put only $20k), our lawyers have advised us to change the terms (change lawyers), we want to keep “full” control (we can’t agree to that), and so on. In the good tradition of “trust but verify” we trust you with our money, and we have a specific list of what you cannot do. As simple as that, non-negotiable…

Working through closing documentation is a much more complex story, and many elements are expected to be negotiated, however what we see is that the truly negotiable elements get sorted out in a week, and what should not be negotiable takes months. Especially difficult to accept by founders are so called “representations and warranties”. Both North American Venture Capital Association and the European one have a standard/template list – in a nutshell, founders declare that they have been truthful during due diligence, did not steal the code from someone else, etc. – it should be a no-brainer. And still so many weeks in the past two years discussing about these issues…

My hope is that founders realise that it is much better to spend a little bit of time familiarising themselves with venture capital funding term sheets, and (if possible) work with a lawyer specialised in VC-funded startups – both their time and ours would be free to focus on what really matters: grow the business.