How to Negotiate With Venture Capitalists | Free - Business in ...

How to Negotiate With Venture Capitalists

Venture capitalists are motivated by huge profits in short order. They seek to double, triple, or quadruple their investment within five to seven years. As such, they will do everything they can to lock in the greatest possible return on investment (ROI) from your company when issuing you a term sheet or stock purchase agreement.

This does not mean that a venture capitalist is someone that wants to bleed your company dry. They will work as your ally to help you grow your business quickly and increase your profits. They are very aware that you will do what it takes to make your business profitable as well. It is not common for them to remove your incentive to do well. Although, once you sign the term sheet, which is a nonbinding agreement that states the terms of ownership of the business once you are funded, the power will be transferred from you to the venture capitalist. This is where such things like liquidation preferences, board control, valuation, and other things take place.

Receiving a term sheet is an occasion to celebrate ? cautiously. It usually means the VC is serious about investing in your company. The term sheet is the critical first step in the stock negotiation process. You must get a lawyer at this point to level the playing field. Your ignorance is a liability, and investors know this. It will not be their fault if you fail to hire lawyer. You and your lawyer will review the terms laid out in the term sheet. You will then communicate with the VCs to determine a final stock purchase agreement ? the official sealing of the deal ? that is most beneficial to you the entrepreneur.

If you want to manage this process in the most efficient manner, request several different term sheets from different firms all at the same time. You will create a sense of competition with the venture capitalist firms if you reach out to each of them all in the same period of one to two weeks. Be sure that your tester emails include that you want to finalize this round of funding for a specific amount of money and by a specific date. This makes your venture capitalists see the urgency of the matter. The law of supply and demand is truly in effect here and it is really effective. You are the only person requesting their business. There are so many of them. This makes it more valuable for them to do business with you. This is also a great tactic for when the venture capitalist binds you with a ?no-shop? term sheet, which will keep you from shopping around to other investors while they are deciding if they will invest or not.

Finally, securing multiple term sheets simplifies the negotiation process by nipping many problems in the bud. The more leverage you have over VCs by creating a competitive market in your favor, the more favorable the final terms are likely to be when you are issued a Stock Purchase Agreement.

Want to raise money quickly and easily? Some methods like crowd funding don?t even require a business plan.

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