When is the best time to negotiate with a startup?

The best time for a VC firm to negotiate with a startup is typically during the early stages of the startup's development, often when they have a promising idea or prototype but require funding to scale and grow. This allows the VC firm to get involved early, potentially securing more favorable terms and a larger stake in the company's success. However, timing can vary depending on the specific needs and stage of the startup, so it's essential for both parties to assess the situation carefully and negotiate in a manner that aligns with their respective goals and timelines.

Based on my experience as a CFO, the optimal time to negotiate with a startup is during a funding round, a time when startups are more open to exploring new opportunities that can boost their growth. If possible, at an early stage of growth. (I recommend reading my article on the different stages).A deep understanding of the startup's culture, its long-term objectives, and the challenges it faces is essential to present a proposal that is attractive to them. Also, a detailed analysis of the startup's financial trajectory and its productscan provide valuable insights into the ideal moment to start negotiations. This analytical approach ensures that the proposals for investments are aligned with the current needs and direction of the startup.

VCs typically target specific stages of startup development aligned with their investment strategy, although some may be stage-agnostic. While negotiation room exists, larger VCs often adhere to standard check sizes and deal terms, reducing flexibility. However, in sectors experiencing significant trends like AI presently, founders may exert more influence over the narrative.

The best time to negotiate with a startup is after thorough due diligence but before finalizing the investment. This timing ensures that investors have a complete understanding of the startup's value, risks, and potential, allowing for informed negotiations. It's also crucial to engage in negotiations when the startup is in need of funding but still has enough runway, ensuring they are motivated yet not desperate. This period allows both parties to discuss terms openly, align expectations, and establish a foundation for a strong partnership. Effective negotiations at this stage can set the tone for a successful relationship, balancing the needs and goals of both the investor and the startup.

It depends on the investor and what the investor brings to the table what stage they should be involved. For me, I get in as early as possible and follow through and follow on. There's no such thing as too early to get involved with the founder and the team. This idea of negotiation and execution of the terms etc needs to happen within whatever stage you're investing in so yeah you have to get that done. Earlier stages tend to favor the qualitative, active investor who magnifies outcomes through connectivity, problem solving, helping out with VC/investor/fundraising type stuff, sharing ideas. Talking to customers. Get in later if you like numbers more.

VCs typically target specific stages of startup development aligned with their investment strategy, although some may be stage-agnostic. While negotiation room exists, larger VCs often adhere to standard check sizes and deal terms, reducing flexibility. However, in sectors experiencing significant trends like AI presently, founders may exert more influence over the narrative.

Assessing a startup's traction at each stage varies based on the idea and the founder's approach. Early-stage traction, again, centers on the foundational 3Ts; TAM, Time, and Team which set benchmarks for viability. The founding team's agility in seizing market opportunities is evaluated at this stage. At the Growth Stage, Investors gauge traction by analyzing the startup's initial investment performance, gauging market penetration strategies, and evaluating cash flow dynamics. In this stage, Cash flow, which indicates the startup's cash burn, churns, and contrarily the sweet indicator - FCF, becomes a critical parameter to evaluate the startup's scalability and financial stability.

Irrespective of a startup's stage or traction, the bond between the investor and the founder creates a sweet spot for smooth negotiation and deal flexibility. Initial conversations set the tone, fostering an environment of mutual goals and synergy. Unjudgemental of the startup's stage, when you as an investor, have an open conversation and good conduct with the founders, it opens up a wider scope for growth stage negotiations. Support at the early stages of the startup by match-making, sharing constructive feedback, and regular conversations with the founders signals your interest in investing in the startup. This opens room for first preferences, mutually favoring terms and flexible leverage at negotiations.

Fundraising timing holds sway over negotiation dynamics, regardless of a startup's stage. In the early stage, it's the Time of the market and how soon the startup wants to capture their SAM, sets the time for their fundraising. Meanwhile, at the growth stage, it's primarily the runway and expansion milestones, which determine investment timelines. Evaluating the startup's growth trajectories, founding and operating team commitments, and their action plan to hit the next milestone (investment series, M&A, or going public) should correlate with your investment goals. Seeking diverse perspectives and aligning investment goals with the startup's caveats ensures the right investment decisions, and sets synergic long-term goals.

In the present investment landscape, particularly as we rebound from the peak valuations of 2021, there has been a notable shift. The tide has turned to favor investors once more, with a more favorable deal environment emerging. Although deal flow has decelerated, there is a substantial amount of dry powder on the sidelines awaiting the right investment.

A good investment philosophy considering the ebb and flow of capital, starts with a foresight of the market conditions, before arriving at an investment decision based on the startup's growth, growth plans, or trajectories. In hot markets, investors gain insights into operational goals and market dynamics, albeit with inflated valuations. On the flip side, cold markets offer relatively lower valuations and substantial risk-reward potential, and if you're sure about your market thesis, it can turn out to be your signature investment. Optimal valuation, with a good growth record and projections, is what you, as an investor seek, while startups expect your support for their next significant milestone, synergic long-term goal, and commitment.

Effective negotiation with startups hinges on established relationships with founders, cultivated from the early stages. The best negotiation strategy begins with an open conversation with the founders and lending indirect support through network or customer connections, who silently help you evaluate the startup's SOPs. Advisory and Feedback at early stages can establish moral support. In a direct approach, investors bullish on early-stage investment can open up for acceleration or an incubation-based approach, which involves skin in the game, right from its inception stages. A mutually favoring term sheet, goal-oriented negotiation, and emphasis on your value in the cap table foster long-term synergies, for both the founder and investor.

In my humble experiences, I've seen several reports about the "perfect" timing to negotiate with a company. These frameworks are good, but they miss the magic: narrative understanding. I prioritize unorthodox measures that show a founder's tenacity and vision over generic milestones. In today's changing market, passion, disruption, and storytelling are worth more than traction reports. Successful investment is a dance, not a formula. It's about seeing potential* before the crowd arrives and trusting your intuition to dance with the right entrepreneurs, regardless of their "stage"... Let's enjoy the journey!