Venture Capital Negotiating Issues

When companies enter into negotiations with venture capital firms, there are several issues which need to be defined and agreed upon. This article describes the key issues. Valuation. Valuation is the most prominent negotiating issues. Valuation is the price of the company in which the venture cap


When companies enter into negotiations with venture capital firms, there are several issues which need to be defined and agreed upon. This article describes the key issues.

Valuation. Valuation is the most prominent negotiating issues. Valuation is the price of the company in which the venture capitalist invests. Valuation determines what percent of the company the investor is buying for their capital.

Timing of the Investment. Many investors will commit a large amount of capital, but will contribute that capital to the companies in installments. Often, these installments are only made when pre-designated milestones are met.

Vesting of Founders' Stock. Like capital, investors often prefer that stock is given to company founders and key employees in installments. This is known as vesting.

Modifying the Management Team. Some investors insist that additional or substitute management employees be hired subsequent to their investment. This gives investors additional security that the company will execute on its business model. An important issue to negotiate with regards to modifying the management team is the amount of stock or options that will be issued to new management team members, as this will dilute the holdings of the founders.

Employment Agreements with Key Founders. Venture capitalists typically do not want companies to have employment agreements that limit the circumstances under which employees can be fired and/or set compensation and benefits levels that are too high. Other key employment agreement issues to be negotiated with venture capitalists include restrictions on post-employment activities and employee severance payments on termination.

Company Proprietary Rights. If the company has an important product with intellectual property (IP), investors will want to ensure that the company, and not a company employee, owns the IP. In addition, investors will want to ensure that new inventions be assigned to the company. To this end, investors may negotiate that all employees must sign Confidentiality and Inventions Assignment Agreements.

Exit Strategy. Investors are very focused on how they will “cash out” of their investment. In this regard, they will negotiate regarding registration rights (both demand and piggyback); rights to participate in any sale of stock by the founders (co-sale rights); and possibly a right to force the company to redeem their stock under certain conditions.

Lock-Up Rights. Venture capitalists may require a lock-up period at the term sheet stage. The “lock-up period” is typically a 30-60 day period where the investors have the exclusive right, but not the obligation, to make the investment. Investors typically conduct due diligence during this time without fear that other investors will pre-empt their opportunity to invest in the company.

Each of these issues is critical when raising venture capital, since the outcome can significantly impact the success of the venture and the wealth potential of the company founders and management team. Because venture capitalists are very knowledgeable regarding these issues, and have great skill in negotiating on them, companies who are raising venture capital should seek advisors who also have this experience and expertise.

Jaswalbhisham

Your Leadership IS Required

The author explains that even though you may be looking at or involved in an automated online wealth generating system, you're not off the hook for demonstrating leadership regardless of how good the training might be that is provided by your system team.



Like many people out there, I’ve recently started my own business from home using an automated online system to make my sales for me and really free up a lot of time. However, there is a misunderstanding that I see out there about these systems that I want to make sure gets cleared up. These systems DO create a ton of freedom for you and for your family once you get them up and running, but I want you to understand some things about what it is you’re doing.

First of all, this is a business you’ve started. It is NO DIFFERENT than if you went out and bought a McDonald’s franchise or opened your own travel agency or anything else. You have to treat it that way. I see so many people get started in online businesses with a hobby mentality. Hobbies are expensive, and if you treat this business like a hobby, that’s exactly what it’s going to be. You need to intend it to be a business. If you treat it like a business, it’ll pay you like a business. If you don’t, then it won’t.

Second, people that get into online businesses because they don’t want to talk to other people are going to find some success, but they’re going to eventually hit a wall. Business is a people-centric undertaking regardless of how you might want it to be. You are eventually going to have to help people or you’re going to find your business crumbling very quickly beneath you. These online automated systems are awesome because you don’t have to cold call people or sell, but they are not a person-less business. Your leadership is still going to be required to help your new people get started, even if it’s just as simple as sending them an e-mail reminding them of a training call.

Just as an example, I work from home and I’m accustomed to a certain lifestyle. I wake up at about 8 AM every day to get moving and get on the morning call for my business, whether to listen or participate. I do this because I’ve chosen to do it. That’s as simple as it is. I decided I wanted to make an income and build the things I want from home, so I went out to find out how to do that. Simple stuff. But I had a new member that needed my help, and he happens to live someplace displaced about three time zones east of me.

Did I tell him I couldn’t help because his availability conflicted with my sleeping schedule? Some people might have, I don’t know, all I know is I sure couldn’t do that.

Why?

Because I value him as a team member. I want to make sure he gets the help he needs when he’s able to get it. He was very appreciate for the time we spent on the phone and I know he’s going to go out now and make something happen. If you can’t be bothered with that, if you can’t see how helping someone else makes a positive change in your life as well, then there’s nothing that can be done until you change you frame of mind. Be the example and realize that your leadership is required.

Jeremy Heesch