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Key Tips for Negotiating Venture Capital Deals

In the lifecycle of your company, raising your first round of venture capital is a significant event. 

Up to the point of raising venture capital, your company may have benefitted from simplistic financing from friends, family and maybe even the odd angel investor.

Moving from this stage of financing and onto more structured venture capital comes with an intense change of pace and a degree of sophistication to the process which you may never have experienced before.  Negotiation is the norm and there will be a lot to get your head round.  That said, there are some things to keep in mind when you are approaching this stage that can help you keep your focus on what is important.

Find the right investors

Ideally you want to be in the position where you have multiple potential financing sources.  This will give you leverage to negotiate the best possible terms but also find the best possible partner for you to work with going forward.  It is important to remember that you will build a close relationship with your investor over many years and it is key that the personal dynamics and relationship work well – if not, it could be an uncomfortable ride.

Know what investors are looking for

Bottom line:  they want to make money.  They invest in the senior management team and not just the product.  They need to believe in you and what you are capable of as well as your idea.  You could have the best idea in the world but if an investor doesn’t buy into you, they’ll not give you any money.  Do you research and make sure that your idea and business can change the world, disrupt existing industries and make money.  Make sure that you are credible and passionate.

Term sheet

The term sheet is an important document.  It will set out the key commercial terms of your deal.  Although it won’t be legally binding, it will be the document the lawyers use to prepare the agreements that formally document your deal.  Get the term sheet wrong and it can be difficult to change the direction of negotiations.

If possible raise more than you need

Whatever you raise, you’ll probably wish that you raised a little more.  If you have access to capital and the terms are reasonable, raise more than you think you need.  There may be compelling reasons to put off raising more (dilution) but don’t lose sight of the transaction costs and time involved in a further round.  By the time you need more money, you’ll wish you didn’t need to shift focus from the business to raising money. 

Be Realistic and Honest

Don’t overestimate the valuation of your company.  Be honest and build a trustworthy relationship with your investor from the start.

Hire the right lawyer

The final point and perhaps one of the most important is choosing the right lawyer.  Obtaining venture capital funding is a high stakes game.  Venture capitalists are smart and they negotiate deals all the time.  You need to hire a lawyer with plenty of experience in negotiating and closing venture capital deals.  A good lawyer will anticipate pitfalls and understand the nuances from both sides of the table.  They can help advise you on what is ‘market’, when to stay firm and when to concede.  Crucially, they’ll help you drive your deal to a successful close. 

If you would like to find out more then please contact Zara Diloo at zara.diloo@mbmcommercial.co.uk or on 0131 357 5814. Zara is a Director in the MBM Commercial's Corporate team with significant UK and international transactional experience in private equity/venture capital and M&A.

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