What to Do (and What to Avoid) When Negotiating With Venture Capitalists

Congratulations! Your business has charmed an investor. Now you’ll need to wade through the term sheet, an outline that lays out the finer points of your funding. The valuation of your company is right there, as is the amount of the investment. But there’s a lot of other legalese, too. Add time pressure to the mix, and a lot can go wrong. Before you sign that term sheet, read these few pointers from the pros. 

Do: Woo multiple investors simultaneously

Investors often come to the negotiating table with more power than founders have–but there’s a way you can increase your leverage. Pitch your company to several firms and try to simul­taneously line up more than one offer, says Noam Wasserman, an entrepreneurship professor at the University of Southern California’s Marshall School of Business (and a member of Inc.‘s advisory board).

The timing is particularly important: Term sheets often include clauses that may prevent you from pursuing other investors for the next 30 days. “If you can interest a couple of people at the same time, you’ll be golden,” Wasserman says.

Don’t: Get overwhelmed by lingo

If you’re baffled by all the legalese, consider using one of Y Combinator’s SAFE contracts, says Amol Sarva, a technology entrepreneur who co-founded Knotel, Halo Neuroscience, Knotable, Peek, and Virgin Mobile USA. “These easy-to-read financing documents are not only friendly to founders, but also fair to investors,” with “vanilla” terms, he says.

Under a SAFE (simple agreement for future equity) contract, an investor makes a cash investment in a company that may convert to stock in the event of an equity financing round or merger. SAFE contracts include some common protections for investors, such as pro rata rights (the ability to participate in future funding rounds), but leave out some more controversial terms, like provisions related to board-seat privileges and veto rights.

Do: Know your priorities

To simplify the nego­tiation, Wasserman advises founders to broadly categorize a contract’s terms into two buckets: those that relate to finances versus those that relate to control. Then ask yourself: Which do you value more? Do you want to see your company grow even if you’re no longer running it–or do you want to remain in control at all costs?

Terms that dictate board seats, veto rights, or drag-along rights (which may allow an investor to force the sale of a company) all relate to a company’s control. Terms concerning your startup’s valuation, options pool, and liquidation preference fall under the financial category. In the negotiation, push for better terms in the category most important to you, and stay flexible on the ones that are not.

Don’t: Be a pushover

Know when to walk away. “I turned down at least one term sheet because of terms that might not benefit the company in later stages,” says Amir Trabelsi, CEO of Genoox, a tech company that runs a genetic data analysis platform.

In one situation, an investor wanted the right to single-handedly force the company to refuse to take on new money, veto rights that Trabelsi felt were too extreme. He was also worried about the message his concessions could send future investors: “You need to think ahead about how the company is structured and how it’s going to be built.” He eventually found other investors and raised $6 million for the company in July.

Do: Pay attention to small details

It’s easy to be blinded by a term sheet’s headline numbers, like the valuation or investment size. But remember to sweat the small stuff, says Stephanie Zeppa, a corporate and securities partner for San Francisco-based law firm Sheppard, Mullin, Richter & Hampton. For example, a missing “non-” can cost you a lot of money.

Most of the time, Zeppa says, VCs’ term sheets entitle investors to “nonparticipating preferred stock” if a company is liqui­dated, meaning they will recoup their initial investment at a specified multiple, plus dividends. But if the term sheet instead asks for “participating preferred” stock, your investors may be entitled to an even larger share when the company is sold. “It’s only a one-word difference, and it could be a huge economic change,” Zeppa says.

What to Do (and What to Avoid) When Negotiating With Venture Capitalists

Congratulations! Your business has charmed an investor. Now you’ll need to wade through the term sheet, an outline that lays out the finer points of your funding. The valuation of your company is right there, as is the amount of the investment. But there’s a lot of other legalese, too. Add time pressure to the mix, and a lot can go wrong. Before you sign that term sheet, read these few pointers from the pros. 

Do: Woo multiple investors simultaneously

Investors often come to the negotiating table with more power than founders have–but there’s a way you can increase your leverage. Pitch your company to several firms and try to simul­taneously line up more than one offer, says Noam Wasserman, an entrepreneurship professor at the University of Southern California’s Marshall School of Business (and a member of Inc.‘s advisory board).

The timing is particularly important: Term sheets often include clauses that may prevent you from pursuing other investors for the next 30 days. “If you can interest a couple of people at the same time, you’ll be golden,” Wasserman says.

Don’t: Get overwhelmed by lingo

If you’re baffled by all the legalese, consider using one of Y Combinator’s SAFE contracts, says Amol Sarva, a technology entrepreneur who co-founded Knotel, Halo Neuroscience, Knotable, Peek, and Virgin Mobile USA. “These easy-to-read financing documents are not only friendly to founders, but also fair to investors,” with “vanilla” terms, he says.

Under a SAFE (simple agreement for future equity) contract, an investor makes a cash investment in a company that may convert to stock in the event of an equity financing round or merger. SAFE contracts include some common protections for investors, such as pro rata rights (the ability to participate in future funding rounds), but leave out some more controversial terms, like provisions related to board-seat privileges and veto rights.

Do: Know your priorities

To simplify the nego­tiation, Wasserman advises founders to broadly categorize a contract’s terms into two buckets: those that relate to finances versus those that relate to control. Then ask yourself: Which do you value more? Do you want to see your company grow even if you’re no longer running it–or do you want to remain in control at all costs?

Terms that dictate board seats, veto rights, or drag-along rights (which may allow an investor to force the sale of a company) all relate to a company’s control. Terms concerning your startup’s valuation, options pool, and liquidation preference fall under the financial category. In the negotiation, push for better terms in the category most important to you, and stay flexible on the ones that are not.

Don’t: Be a pushover

Know when to walk away. “I turned down at least one term sheet because of terms that might not benefit the company in later stages,” says Amir Trabelsi, CEO of Genoox, a tech company that runs a genetic data analysis platform.

In one situation, an investor wanted the right to single-handedly force the company to refuse to take on new money, veto rights that Trabelsi felt were too extreme. He was also worried about the message his concessions could send future investors: “You need to think ahead about how the company is structured and how it’s going to be built.” He eventually found other investors and raised $6 million for the company in July.

Do: Pay attention to small details

It’s easy to be blinded by a term sheet’s headline numbers, like the valuation or investment size. But remember to sweat the small stuff, says Stephanie Zeppa, a corporate and securities partner for San Francisco-based law firm Sheppard, Mullin, Richter & Hampton. For example, a missing “non-” can cost you a lot of money.

Most of the time, Zeppa says, VCs’ term sheets entitle investors to “nonparticipating preferred stock” if a company is liqui­dated, meaning they will recoup their initial investment at a specified multiple, plus dividends. But if the term sheet instead asks for “participating preferred” stock, your investors may be entitled to an even larger share when the company is sold. “It’s only a one-word difference, and it could be a huge economic change,” Zeppa says.

What to Do (and What to Avoid) When Negotiating With Venture Capitalists

Congratulations! Your business has charmed an investor. Now you’ll need to wade through the term sheet, an outline that lays out the finer points of your funding. The valuation of your company is right there, as is the amount of the investment. But there’s a lot of other legalese, too. Add time pressure to the mix, and a lot can go wrong. Before you sign that term sheet, read these few pointers from the pros. 

Do: Woo multiple investors simultaneously

Investors often come to the negotiating table with more power than founders have–but there’s a way you can increase your leverage. Pitch your company to several firms and try to simul­taneously line up more than one offer, says Noam Wasserman, an entrepreneurship professor at the University of Southern California’s Marshall School of Business (and a member of Inc.‘s advisory board).

The timing is particularly important: Term sheets often include clauses that may prevent you from pursuing other investors for the next 30 days. “If you can interest a couple of people at the same time, you’ll be golden,” Wasserman says.

Don’t: Get overwhelmed by lingo

If you’re baffled by all the legalese, consider using one of Y Combinator’s SAFE contracts, says Amol Sarva, a technology entrepreneur who co-founded Knotel, Halo Neuroscience, Knotable, Peek, and Virgin Mobile USA. “These easy-to-read financing documents are not only friendly to founders, but also fair to investors,” with “vanilla” terms, he says.

Under a SAFE (simple agreement for future equity) contract, an investor makes a cash investment in a company that may convert to stock in the event of an equity financing round or merger. SAFE contracts include some common protections for investors, such as pro rata rights (the ability to participate in future funding rounds), but leave out some more controversial terms, like provisions related to board-seat privileges and veto rights.

Do: Know your priorities

To simplify the nego­tiation, Wasserman advises founders to broadly categorize a contract’s terms into two buckets: those that relate to finances versus those that relate to control. Then ask yourself: Which do you value more? Do you want to see your company grow even if you’re no longer running it–or do you want to remain in control at all costs?

Terms that dictate board seats, veto rights, or drag-along rights (which may allow an investor to force the sale of a company) all relate to a company’s control. Terms concerning your startup’s valuation, options pool, and liquidation preference fall under the financial category. In the negotiation, push for better terms in the category most important to you, and stay flexible on the ones that are not.

Don’t: Be a pushover

Know when to walk away. “I turned down at least one term sheet because of terms that might not benefit the company in later stages,” says Amir Trabelsi, CEO of Genoox, a tech company that runs a genetic data analysis platform.

In one situation, an investor wanted the right to single-handedly force the company to refuse to take on new money, veto rights that Trabelsi felt were too extreme. He was also worried about the message his concessions could send future investors: “You need to think ahead about how the company is structured and how it’s going to be built.” He eventually found other investors and raised $6 million for the company in July.

Do: Pay attention to small details

It’s easy to be blinded by a term sheet’s headline numbers, like the valuation or investment size. But remember to sweat the small stuff, says Stephanie Zeppa, a corporate and securities partner for San Francisco-based law firm Sheppard, Mullin, Richter & Hampton. For example, a missing “non-” can cost you a lot of money.

Most of the time, Zeppa says, VCs’ term sheets entitle investors to “nonparticipating preferred stock” if a company is liqui­dated, meaning they will recoup their initial investment at a specified multiple, plus dividends. But if the term sheet instead asks for “participating preferred” stock, your investors may be entitled to an even larger share when the company is sold. “It’s only a one-word difference, and it could be a huge economic change,” Zeppa says.

3 Venture Capitalists’ Best Advice for Female Founders

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Female Founders Only Received 2.2 Percent of Last Year’s VC Funding, But There Is a Silver Lining

Female founders received more venture capital funding in 2017 compared to previous years, but it was still far less than their male counterparts.

Women-led teams received just $1.9 billion of the total $85 billion invested by venture capitalists in 2017, which is just 2.2 percent of the year’s total, according to data from VC database PitchBook, an M&A, private equity, and VC database, reported by Fortune. In comparison, all-male teams received $66.9 billion–or 79 percent–of the total amount. The remaining 19 percent went to mixed gender teams or groups whose gender makeup was unconfirmed.

While the difference in funding is massive, it’s slightly smaller than in previous years. Female founders raised $1.4 billion, or 1.9 percent, of total funding in 2016. Additionally, with the exception of 2014, last year’s total percentage was the highest on record for women-led teams since PitchBook began tracking such data in 2006.

There’s no definitive answer as to why female founders raise less venture capital than male founders, but one of the main theories is the lack of female VCs. “The small number of venture firms with female founders and/or an unusually high percentage of female partners invest at elevated levels in female entrepreneurs,” according to a 2016 CrunchBase report on venture capital funding.

As a solution, female founders should investigate crowdfunding, where women entrepreneurs raise more money than male founders.

It’s 2018. How Are You Not Funding Your Startup Via Tokenized Equity on the Blockchain?

Investing in startups is hard. If you don’t meet the financial requirements to be an accredited investor, you can only invest a small portion of your wealth, and the equity you get in exchange can be illiquid for a long time, assuming its value doesn’t just go to zero. 

A new startup is looking to solve that problem using — is it even necessary to say this in early 2018? — blockchain technology. Called Securitize, the company is the apotheosis of the current “throw it on the blockchain” trend: It’s a platform for running an ICO (which stands for “initial coin offering”) without doing all the technical heavy lifting yourself.

The startup has made sure to bake in its lawyers’ advice, with the hope of avoiding the SEC’s baleful eye. VentureBeat reported that Securitize “promises fundraising companies, and their investors, peace of mind that they’re in full conformity with domestic and international laws,” due to the regulatory compliance features that the company built into its product.

Securitize also “enables a new era of venture funding, where investors can buy-in knowing the assets are completely liquid from day one.” Liquid assets are ones that you can liquidate essentially whenever you feel like it. Historically, owning equity in a startup has not worked like that, and unloading shares can pose problems when investors want an exit prior to an acquisition or IPO. (Employees compensated in options have also struggled to find liquidity, and in the future, it’s possible that tokenized equity could help new hires avoid the “golden handcuffs.”)

The latest and most intriguing of Securitize’s projects is 22X, a fund that offers tokenized equity in 30 startups — up to 10 percent of each. The whole cohort of 30 went through the accelerator program run by 500 Startups during the summer of 2017, although 500 Startups itself is not involved in running 22X. The pre-sale opens this Friday, January 26. 22X’s goal is to raise $35 million, distributing $1 million to each startup and using the rest to cover the costs of putting on an ICO.

Unlike many cryptocurrencies and associated tokens, 22X is abiding by United States law and only accepting accredited investors, and following the equivalent laws in other national jurisdictions. Nevertheless, a yearly income of $200,000 or a net worth exceeding $1 million are lower hurdles than being a partner in a VC firm. (Citizens of China and South Korea, where cryptocurrencies are illegal, will be blocked altogether. “They could fake their location” using a VPN or similar tool, a 22X representative conceded. But “they would be unable to fool” 22X’s know-your-customer process.)

“Democratizing access to startup capital is the most significant innovation opportunity for the next ten years,” Ashwini Anburajan, founder and CEO of participating startup OpenUp, told tech website ChipIn. 22X also offering the participating startups access to foreign capital without the overhead of needing to cultivate personal relationships and go through individual due diligence procedures. 500 Startups’ established reputation will presumably help boost 22X, even though the accelerator is not actively involved.

The 30 startups aren’t shunning traditional venture capital, having emerged from that ecosystem, but they are opening themselves to a blended model of semi-diversified funding. The whole tech community will be watching to see how it turns out for these trailblazers.