What are the most important VC negotiation trends to know for your career?

Asymmetric information is the name of the game, whether it's identifying unique sources of deal flow, getting superior due diligence information (beyond the positively slanted data the prospect will provide), and negotiating favorable but fair terms. Data driven negotiations make a difference on the margins and that matters across a portfolio of investments.

In remote negotiation, leverage technology for virtual meetings, document sharing, and electronic signatures to streamline the process. Prepare meticulously, ensuring all parties have access to necessary information and documentation beforehand. Communicate clearly, addressing concerns promptly and fostering trust through active listening and transparency. Finally, build rapport by acknowledging the challenges of remote communication and seeking common ground to facilitate constructive discussions.

In venture capital, staying ahead means keeping pace with negotiation trends. A shift towards founder-friendly terms emphasizes equitable agreements, including protective provisions and extended vesting schedules. Flexible financing, like convertible notes and SAFE agreements, offers adaptability for startups and investors. ESG criteria are increasingly central, highlighting a commitment to sustainability and ethics. The digital transformation demands proficiency in remote negotiations, while the competitive landscape requires swift decision-making. Being informed and agile in these areas can significantly enhance negotiation strategies, paving the way for fruitful VC partnerships.

Sustainability-focused Negotiation As the global emphasis on environmental, social, and governance (ESG) criteria grows, sustainability-focused negotiation is becoming increasingly important in the VC industry. This trend involves prioritizing investments that not only offer financial returns but also contribute positively to societal and environmental outcomes. In sustainability-focused negotiations, parties assess the long-term impact of their investments on sustainability goals, integrating ESG factors into their decision-making processes. This approach encourages the development of innovative solutions to global challenges.

VCs are pushing for 3+ year plans to ensure sufficient runway before the next funding round. Be prepared to map out milestones over a longer timeframe.

Knowing the unit economics and fully understanding the voting/info rights of any deal is important and should be two prongs you think about. A third is industry trends. Is the industry hot? Supersaturated? Fragmented? Who else is in the space and does this company have the chops to be a true player? A fourth is one most don’t do; it’s thinking about the whole team (everyone too to bottom), its strengths and more importantly, its weaknesses. Amassing information around the Who behind the What, How and Why, will tell you more about the likelihood of success, particularly early on, than many other factors.

Negotiations involve various aspects. Although in certain aspects of business evaluation (such as market) data is accessible, in some areas (like team evaluation) Access to data sources or the conversion of qualitative data into quantitative data poses potential difficulties.

The growth at all costs mentality is out. VCs are prioritizing startups with solid revenue streams and a path to profitability. Highlight your revenue traction.

Incorporate objective metrics and evidence in your negotiation strategy to enhance transparency and credibility. Select and present data that aligns with your objectives and resonates with your counterpart, while balancing it with human factors like intuition and empathy to build trust and foster collaboration during negotiation.

Utilization of analytics and metrics to assess the viability of ventures and make informed investment choices. Data literacy helps evaluate businesses based on quantifiable factors rather than intuitive assumptions

The hardest part of a negotiation between a VC and a CEO I believe is the complexity of the CEO's constituencies. He/she needs to think about co-founders, employees, existing investors, customers etc... and how a VC in a round impacts everything and everyone. In more complex rounds, it helps get the round down if as a VC you are thinking out it as not just a win-win, but a multiple win scenario, with an understanding that there needs to be flexibility without compromising core requirements, so understanding what those core requirements are across the constituencies, and using creativity and collaboration are critical.

VCs highly value founders with deep industry/sector expertise and experience. Leverage your specialized knowledge in negotiations.

Collaboration is often stumbling block to success - as the parties involved usually do not go through the vigour of a structured collaborative negotiation to ensure it’s indeed a win-win collaboration.

Embrace a collaborative mindset in VC negotiation, prioritizing mutual value creation over zero-sum outcomes. Focus on understanding each party's interests and goals to identify shared objectives and foster creative solutions. By cultivating a cooperative approach, you can build stronger partnerships and unlock opportunities for collective success in the VC industry.

Adopting a collaborative approach to negotiations enhances the likelihood of successfully finalizing a transaction. Unilateral terms typically prove ineffective; even if an investor initially prevails, discontentment on the founder's part can significantly impact their performance, subsequently affecting the growth and valuation of the invested company. Strive for fairness and equilibrium in all negotiations, distributing risks and rewards in a proportional and accountable manner.

Inclusive negotiation in the VC industry emphasizes recognizing diversity and fostering equal participation for all stakeholders. It involves active listening, empathy, and adaptation to ensure that everyone's perspectives and needs are valued and addressed. By embracing inclusivity, VC negotiators can create more equitable and effective deal-making environments, driving innovation and growth across diverse communities and sectors.

VCs highly value founders with deep industry/sector expertise and experience. Leverage your specialized knowledge in negotiations.

Inclusion ensures that diverse perspectives and voices are heard, leading to more innovative and sustainable solutions. Recognizing and addressing biases fosters a culture of fairness and equity in negotiations. Cultural competence and sensitivity to different backgrounds are critical for effective communication and relationship-building. Creating an inclusive environment encourages trust and fosters collaboration among all parties involved.

Due to uncertainty, early stage startups are considering M&A earlier. Be open to acquisition conversations as part of negotiations.

Ethical negotiation in the VC industry demands transparency, fairness, and integrity throughout the negotiation process. Upholding professional conduct and honesty is crucial to maintaining trust and fostering positive relationships with all stakeholders. By prioritizing ethical practices, VC negotiators can uphold their reputation and contribute to a culture of integrity within the industry.

Understand motivations and intent of the investor you are talking to. Talk to others and learn their experiences. Many startups fail, how a VC behaves in that wind down show what kind of character you are dealing with…. do you want to be funded by someone like that?

It’s a mindset once again. If we are looking to create an environment of mutual benefit we are getting further in life. While on the short term a better deal can be negotiated, especially in challenging market situations, the cycle always changes and its important to build a relationship of trust - also for the future

Ethical conduct is fundamental for maintaining integrity and credibility in the venture capital industry. Adhering to ethical principles such as honesty, transparency, and fairness builds trust and enhances reputation. Ethical decision-making requires moral reasoning and integrity, even in challenging situations. Upholding ethical standards fosters long-term partnerships and contributes to the overall success and sustainability of the business ecosystem

Learning negotiation in the VC industry is an ongoing process that demands curiosity, adaptability, and a willingness to learn from both successes and failures. Seeking feedback, reflecting on experiences, and embracing new approaches are essential for continuous improvement. Engaging with mentors, peers, and experts allows for valuable knowledge exchange and contributes to personal and professional growth within the community.

With tightened investment criteria, aim for mutually beneficial negotiations that meet the needs of both parties. Identify shared goals. The trends point to a more measured, back-to-basics VC environment. Adjust your negotiation strategy and messaging accordingly to secure funding.

Continuous learning and adaptation are essential in navigating the dynamic landscape of venture capital negotiations. Staying updated on emerging trends, best practices, and industry developments enhances negotiation effectiveness. Reflective practice and feedback mechanisms help identify areas for improvement and refine negotiation strategies over time. Open-mindedness and a willingness to learn from both successes and failures are key attributes for ongoing growth and success in negotiation endeavors

Very often I see VCs and founders girding up for battle. However, negotiations are not one-sided, winner takes all affairs. It's not binary. VCs and founders are entering a 7-10+ year relationship. How they act at this juncture is often a precursor to how they will act in the relationship. As most endeavors pivot, have ups and downs, and are nonlinear, it behoves both parties to negotiate in good faith, with an eye towards mutuality.

Negotiations often involve discussions on earnouts and milestones. Investors may structure deals with performance-based elements, tying a portion of the investment to the startup achieving specific goals over time.

Take it or leave negotiation. It swings from VCs doing it to Entrepreneurs doing it. Today we are an investor market. In 2021, entrepreneurs were in charge.

There's a growing emphasis on realistic valuations, with investors and entrepreneurs alike recognizing the importance of aligning valuations with company fundamentals and market conditions. This trend reflects a shift away from overly inflated valuations and towards more sustainable and rational pricing.

When you try & sell your business case to VCs, keep in mind you are talking to the right VC given the line of business. VCs have their predilections as to what businesses they invest in and own. Don't start valuation topic and negotiation unless you have sufficiently sold the business (in mind) and the VC has bought into it (in mind). Once the VC has liked your business and you as the founder, then comes the negotiation. Hard negotiations are unnecessary / unhelpful. Not more than a couple of rounds.