FEATURE > Venture Capital

In depth: negotiating with VCs
"The first thing people get really burnt about is 'how much are you valuing my company?'" said Balaji Srinivas of Aureos Capital.

All the VCs offered the same advice: don't focus exclusively on valuation. Look at all the deal terms as a whole, because they can dramatically affect the real "price" of your capital.

> What is a Term Sheet, and are there standard terms?
> Negotiating valuation: how do VCs price a startup?
> Insider’s advice from VCs to entrepreneurs
> Snapshot of basic terms in a Term Sheet
Sample term sheet 1   Sample term sheet 2  
What is a Term Sheet? Are there standard terms?
When do you start negotiating?

VCs and entrepreneurs can start negotiating the terms of the deal fairly early in the investment process. Bharati Jacob of Seedfund likes to agree on terms before diving into too much due diligence: "Let's just make sure we're in the same ball park, so we don't waste our time and energy."

The goal: To agree on a Term Sheet

Term sheets act as "a statement of intent from a VC saying that I like your business" explained Balaji Srinivas of Aureos Capital and lay out the terms under which the VC will invest. Avnish Bajaj, Matrix Partners, explains that they outline the, "rules of engagement." Terms would include pricing, controls, rights and preferences. Even after agreeing, these terms might be renegotiated based on the findings from further due diligence on the part of the VC.

Is there a 'standard' Term Sheet?

The basic terms for early stage companies are similar across term sheets. This, no doubt, reflects the fact that VCs are wrestling with similar risks, and targeting similar returns.

However, term sheet styles can be as different as the VCs themselves. Some VCs, like Balaji, like to work in broad terms, leaving the fine tuning for after the detailed due diligence.

Others, including Avnish Bajaj prefer to get all everything nailed down at the outset. He believes that "if the term sheet is done in a very skeletal fashion, the probability of the deal falling apart later is higher."

What terms can one negotiate?

Even though many of the terms are similar across the industry, there will be some that don't apply to certain companies or situations. And of course, there is a lot of room to negotiate the aggressiveness of each of the terms - not only share price.

Within veto and approval rights, for example: What's ok, and what's a stranglehold? Does the VC want to approve only the CEO hire, or the entire management team? Does the VC approve the annual business plan as part of the Board, or does he or she want additional, separate approval rights under certain circumstances? What's appropriate for this particular investment? Sometimes, what makes sense to a VC may place real operational constraints on the entrepreneur.

It's a trade off

The link between valuation of the company and aggressiveness on certain terms is very clear. The higher the price a VC pays for the shares, the more aggressive he will likely be on the other terms, in part to insure the greater risk he has taken by paying a higher price.

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