How can you negotiate investment terms while maintaining a positive relationship with the startup?

Think deep, understand where the counterparty comes from. Do not just think from your own perspective, think if you are on the other side, will you proceed with the deal?

Since we are discussing this in the case of startups I would add the following to consider before you decide to start fundraising: 1. Be selfcritical, does the startup have the necessary skills / teammembers to deliver on their targets. 2. Does it have a balanced cap-table that gives all co-founders and critical team members incentives to stay with the company for a period of minimum 4 years. Does all shareholders have a minimum 4 years vesting period 3. Dom have numbers and KPI's do ensure a smooth process 4. Have you practised your presentation enough with a third party? Do you know your numbers? Have you practised a Q & A session 5. Do you have a reasonable timeplan for the process These are a few things to remember. Good luck!

Always try to keep the window open..show flexibility and try to build a bridge of confidence between you and the other party...avoid sharp sentences .

Don't just "do your homework. Being the task is what changes things. It would be best to dive deep and then surf the strange waves. Traction and room to grow? Important, but what about the startup's ability to change and come up with new ideas? Value methods are so last year. Let's talk about impact and how to align our goals. It's not just numbers that matter in negotiations; it's also about stories and possibilities. Don't forget that we're not just investing in businesses; we're also investing in tomorrow's news stories. Just don't make expectations too high; let's change what "realism" means. They say, "In a world of algorithms, hashtags, and followers, keep it real." Let's make every deal enjoyable.

This is why I believe being a specialist investor is more important than ever...it allows you and the founders to get straight to the point. Both the investor and founder can penetrate the noise and move immediately into the pertinent points not only relevant for the sector, but for the specific conditions, channels and customer backdrop that the business is living day by day. Both sides can quickly start framing the ways in which a potential partnership will be able to support the business in scaling. The whole process is streamlined, enabling both parties to focus on building the relationship and communication from the outset, and indeed flushing out any red flags for all, very early on.

Firstly, ensure your startup team equity is pari pasu to investors. They are the idea and execution. They deserve this and your Relationship will always be better at Even terms. Secondly : Money is easy to take. Its harder to monetize the right way. Ensure you have a hands on support and advisory capbility to exec team. They will need recruitment Help. Product advisors. GTM support. Do not shy away from setting advisory circle around them. Finally - if you are a fund with many portcos connect the peers. The network itself can add powerful capability for growth. The highest value you can add to them is Financial backing and creative support. Future belongs to creators!

Let's make things interesting: NOW, the game has changed! Founders aren't just looking for money; they're also looking for people to work with on new ideas. Here's the catch: don't just say what you're worth; show it. You can be a mentor who sends memes, a networker who makes friends on TikTok, or an expert who shares their knowledge through podcasts. Don't just talk about words; talk about trends as well. Remember that your worth isn't just in what you offer but also in how relevant and new it is in a world where startups change directions faster than a TikTok trend. It's said, "In the startup world, the only constant is change; be the change-maker, not just the check-writer." Or a LinkedIn commentator like me? #braintraining

Founders are now looking for more value-adds especially in this age where capital is more easily accessible. Communicating early also (1) sets the right expectations with each other on what you can value-add (or prioritising on thing that the founders lack) before getting into the relationship (2) helps founders to select and amass a team of VCs who are complementary to one another. (3) secures a long-term healthy relationship that benefits founders rather than a distraction.

Reminds me of my early days when I negotiated a term sheet with a VC fund. We had high leverage due to IP, traction, and team, and most people at the VC firm were excited about the deal. I made the mistake of making it all about valuation, and liquidation preference (tangibles). I didn't discuss and ask about the (intangible) things such as opening doors in the industry, finding partners in the ecosystem, helping with a difficult cultural situation, etc. It was my fault, but I can say that the VC fund could've done better in communicating their overall value that stays outside the capital investment. They could've shared some examples where they helped founder get better deal in a subsequent round, close a tough deal with a customer etc

Forget just being a cash dispenser! Show you're more than just a walking ATM by highlighting the unique strengths you bring to the table. Explain how your expertise, network, and experience can be the rocket fuel that propels the startup to success. Be their mentor, their cheerleader, their secret weapon. By showcasing your value beyond the money, you not only build trust and respect, but also justify your asks for board seats, info rights, or whatever else helps you both win big. Remember, it's not just about the deal, it's about building a team that soars!

Focusing on the big picture is essential but I'd also add to see the long-term outcome. It's important not to lose sight of the overall goal and long-term partnership while navigating the specifics. Prioritizing key terms and shared interests fosters a stronger, more collaborative relationship with the founders.

Perspectives of the Big Picture : ? Investors & Startups must see the similar big picture. May need time to settle into this alignment. ? While some technical details and opinions may vary, it's best to focus on the milestones and mapped journey & risks adjustments. Understanding of vested interests will help to arrive at point of common returns. ? Framing the outcomes and create incentives of reaching deliverables and financial results. It's the same TEAM on the same boat.

Negotiating with startups can feel like haggling over ingredients in a recipe. But remember, you're not just crafting a deal, you're cooking up a future together. Sure, terms like valuation and dilution matter, but don't get lost in the spices. Focus on the main course: the big picture vision. Shared Goals: Align with the founders' aspirations. What problem are you both passionate about solving? How can your expertise and their drive be the secret sauce? Mutual Wins: Seek solutions that benefit everyone, not just your bottom line. Think long-term value creation, not short-term gains. By keeping your eye on the prize, you'll navigate negotiations with less friction and more flavor.

I can say, "don't miss the forest for the trees, but beware of termites!" Trends from the beginning of the year show that small things that are easy to miss can make or break a deal. Yes, you should pay attention to valuation and fairness, but you should also be aware of how powerful new tools and market changes can be. Finding the right balance between hard facts and the more personal side of business is the real art. Like making a good beer, building a relationship takes the right ingredients, the right time, and a bit of intuition. "Be more chef than calculator in the world of VCs," as the saying goes. But in my personal opinion, be yourself with a trustworthy attitude.

I have seen myopic vision on both sides of the table. Not just founders who are laser-focused on valuation, some VCs are also focused on "getting the most bang for the buck". It's true in sales and it's true with venture capital. Negotiation is more a mindset than a tactic. Tactics lead to zero-sum games; mindset shifts allow win-win situations. A mindset that allows for each party to consider and care for others' interests always ends in a win-win situation.

Building a strong relationship for both investors and founders is not a one-time event, but a continuous process, and a key determinant for long term success. From the outset therefore, it is important for the investor and founder to be tuned into the extent to which there is collaboration on decision-making and respect for each other's contributions. Mutual accountability is another big thing I lean into very early in the process...it sounds so obvious but a red flag for both investors and founders should be the presence of lying, embellishing or concealing. Honesty is the bedrock of success and should be a non-negotiable. If you spot anything to the contrary, walk away!

The power of Transparent dialogue Maintaining transparent and respectful communication with a startup is a fundamental element when negotiating investment terms. It's essential to be candid and open about your objectives, anticipations, and apprehensions while steering clear of concealed motives or unexpected developments that might undermine trust and the relationship. Additionally, it's crucial to engage in active and empathetic listening to comprehend the startup's standpoint, recognizing their requirements and emotions. Avoid excessive aggression or defensiveness, as well as any attempts at pressuring or issuing ultimatums, which could prove counterproductive or offensive.

This is the most important element. I have been in very tough negotiations, but when both sides are transparent, consistent and clearly communicate, even when things don’t work out, I have found there to be mutual respect.

Transparency and respect? Of course! But don't forget that this is a serious game, not a tea party. You can be "honest and upfront" and also smart about how you use your time and money. Don't forget that it's a dance, not a fight. Active hearing? It's more like actively planning. Next week will be 2024; AI, blockchain, and sustainability are all the rage in the startup world. We're not just owners; we also set trends. Let's not use business speak and just talk about things. There should be no secrets, but there should also be no sugarcoating. "Speak softly, but carry a big term sheet," as the saying goes. To be strict, fair, encouraging, and two steps ahead, you need to strike the correct balance. Let's make news, not just shake hands.

What I've found most helpful is to have a clear rationale from the other party on why they expect for a certain term to be this way esp. if its bespoke to the deal. Most commonly, i see valuation models are the most robust from investors (comparables, adjustments, projections etc.) however, other bespoke terms less well backed (eg. preference payout). If the rationale is unclear to the other party, you risk losing credibility. Be transparent in your objectives (eg. we are targeting for a certain ownership level with this $$ investment).

Flexibility and creativity are vital in negotiations. Templates are not always the best ideas. Exploring various structures and terms can lead to mutually beneficial outcomes, demonstrating that negotiations can indeed be a value-creating process rather than a zero-sum game. This approach encourages cooperative solutions and long-term success.

Most of the times deal breakers are caused by miscommunication. It is vital to explain the rationale behind the terms and also to listen founders with empathy. I believe it is more productive to have investor to founders sessions rather than exchanging word documents.

I am not a fan of SAFE agreements. Too often we see a case where valuation is not defined and later in The future preference rounds discredit initial investors. The convertibles Also hurt Business as They often come with % attached to it and stress The founders out. Converts work for small amounts. Use The right EV not to make The empty promise you will need to live Up to. You could use discounts , incentive equity or buy back option as well. These work wonders when Company matures.

It's clear that being flexible, creative, and seeing things from everyone's point of view are no longer nice-to-haves; they're necessities. Remember that in the world of businesses, the person who can bend the most often stands the tallest. Let's not just trade pie slices; let's make the pie bigger! Don't just look at the terms; sometimes, the best equity isn't a percentage but a shared goal for growth. "A great deal" means that everyone leaves the table happy and a little worried. Let's come up with new ways to invest while we invest in new ideas!

Flexibility and creativity are the product of a prepared and sincere mind. Preparedness allows us access to all the options we can explore and all the levers we can pull. A sincere interest in what matters to the other party enables us to pull those levers. Most VCs know all the levers like the back of their hands, but they often forget that the founders might not know all that is right for them. By being flexible and designing creative solutions that work for both parties (and the company's long-term performance), VCs can not only start the deal at a high point but can also enable a high chance of company success in the long run.

The role of lawyers and accountants in an investment deal can't be over-emphasized. By delegating the detail-oriented work VCs (and founders too) allow themselves the time and attention and energy to stay high level. Keep looking at the big pictures while the important details such as legal terms, financials (and skeletons in the closet) can be taken care of by the experts.

Professionals should also envision scenarios and risks that are not according to plan. Will there be ample liquidity and working capital if a key customer ceases doing business? Sometimes a "worse" scenario is a top customer doubling! It should be better but such situations can create operational and financial strain. What about methods/avenues for resolving disputes and disagreements? How might agreements and deals adapt to changing business performance and conditions?

My advice is to seek professional advice. You need to seek out someone who has done deals before and incentivize them to show you the ropes if you haven't done this before. Make sure to make a square deal for all parties because it will bite you if you don't later. Get a real perspective for all stakeholders when you make the deal and reach out for help to someone with many years of experience who can speak to what worked and didn't from their track record. Then they can help you dot your i's and cross your t's. Don't screw up your execution because you didn't ask for help and be stuck with it for no reason. It just makes more of a mess when they want to help you later. Ask help and follow up / be persistent.

Startup negotiations can be exhilarating, but complexity lurks beneath the excitement. To protect your investment and secure a win-win outcome, bring in the cavalry: professional advisors. Think of them as your negotiation ninjas, equipped with: Legal Scrutiny: Lawyers dissect contracts, ensuring your interests are watertight. Financial Forensics: Accountants sniff out potential discrepancies, protecting your finances. Risk Radar: Consultants scan the landscape, highlighting challenges and suggesting solutions. Their expertise goes beyond just reviewing documents. They can: Craft Compelling Terms: Negotiate clauses that benefit both you and the founders. Navigate Disputes: Mediate disagreements and find common ground.

Startup investing is complex by nature. One thing that makes it so is the variety of specialties involved, including legal, tax, financial engineering, valuation, risk management, accounting, product development, technology, strategy, and more. Certainly, individual investors can't handle all these aspects personally; they need professional advice on specific topics. Beyond the complexity, in case of corporate investors, having a second advice on specific aspects can illuminate the path to the good decision.

Approach discussions with transparency and respect. Clearly communicate your expectations and rationale, listen to the startup's needs and concerns, and aim for a fair agreement that recognizes the startup's potential and addresses your risk. Building a foundation of trust and mutual understanding is key and after all it's all about founders! Without visionary founding team, money means nothing so be fair but remember the founders are the core of the company you are trying to support.

Be mindful of the fact that as the deal negotiation progresses, the balance of power progressively shifts towards the startup. This is because after a while, the sunk cost of pulling out of a deal becomes high so everyone at the firm will push to get it done, even if you hit bumps in the road. It's therefore a little risky to push sensitive negotiation topics all the way to the end. Plus, you also risk getting deal fatigue if the negotiation drags on, which will fray tempers and make you less objective. Get the tough points out of the way early so that you get smooth sailing later on when everyone gets tired and just wants that deal closed.

“ Negotiation should be a mutual education and exploration process.“ Starkly saying that a term is “standard“ or “market“ and should therefore be accepted is offensive… Unless it’s followed by “because here’s how it protects, and rewards the folks who are in my position in deals and here’s how this has played out over time in many circumstances just like this”. Said differently, the term doesn’t represent a personal judgment by a counterparty about their counterparty’s integrity or competence. It’s a neutral expression derived over a presumably statistically valid universe. Then ask if that explanation makes sense. What would they seek if they were in your position? Look through your counterparty’s eyes. Educate and explore.

Negotiating investment terms while nurturing a positive startup-VC relationship demands a dual approach. Firstly, at the strategic level, transparent communication between founders and VCs is paramount. This alignment of visions and goals lays the foundation for trust and a harmonious partnership. Secondly, at the in-depth level, legal teams play a crucial role in managing potentially tough negotiations. Their primary goal is to proactively prevent any adversarial discussions or conflicts between VCs and founders from the outset, recognizing that such disputes can have long-term consequences. They serve as the intermediary, deftly averting any negative interactions and setting the stage for a fruitful relationship.

Negotiating terms needs careful thought and deliberation. VCs should offer a term sheet only after they are 100% sure - when the business due diligence is complete and the entire partnership agrees. However, there are some practices that can harm the relationship: - Sometimes, VCs hand out a term sheet too early - to stop the startup from exploring other options. They do this before deciding if they really want to invest - only to ‘pull the term sheet’ later. - Then there's ‘exploding term sheet’ - when VCs give a term sheet but say that the startup has to agree to it within 24 hours. It's important for both sides to feel comfortable and not pressured. Building a good relationship means taking the time to consider everything carefully.