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January 4, 2005
Some Things to Consider When Negotiating Against Those Venture Capital Barbarians At The Gate
Topic: 3) Ventures

A little tongue in cheek I guess. A post by Brad Feld (VC at Mobius) followed by a post by Jeff Nolan (VC at SAP Ventures) triggered me to write this post about term sheets. Having worked mostly on the operating company (seller) side of things, I thought it would be interesting to note a few perspectives on terms and negotiating from a side other than the VC side of the table. Here are a few thoughts:

1) Valuing an "investment" depends somewhat on the other things in your "portfolio". An investment (whether taking money or giving money) cannot be looked at in isolation of what else you hold. As an example, home owner's insurance is worthless to someone who does not also have a home. The insurance is a hedge investment that goes up when you lose the home though. Now for the entrepreneur, the value a VC brings (e.g., complementary connections, partners, or expertise) to the table should also be factored in beyond price they value your company at. Look at what assets you have (e.g., current people on your team pre-funding). I recall (hopefully correctly) that Mena Trott (at Six Apart) blogged about how Sequoia Capital's money was the "best" even though it was not necessarily best from a pre-money valuation perspective. Now some will say there is an age old saying that "Money talks, _____ walks" (ask mom or dad about this one if you don't know what I'm referring to). Nevertheless, go through the thought process of not just looking at price.

2) Consider using lawyers as a part of good cop/bad cop tactics during negotiations. I've worked with counsel from firms like Piper Rudnick, Greenberg Traurig, Jenkins & Gilchrist, and others - lawyers are smart. Though they can be expensive and extent of use should be weighed by stage of investment and company specifics (vs. using a company godfather, experienced friends, or management's own experience, say), lawyers can help you effectively wade through mechanics of term sheets, stock purchase agreements, amendments to articles, investors rights, etc. Sometimes you can get the lawyers to draft bad cop memos (or play bad cop roles) for you to respond to VCs on legal docs while you stategize, value the terms from your perspective, and play good cop.

3) Be able to "name the game". A key to negotiating is being able to understand the game being played. Playing some games require greater understanding of mechanics. The term sheet and the subsequent legal docs (if a term sheet is executed) are areas where mechanics can be hairy than the "average bear". Unfortunately, entrepreneurs tend not to negotiate legal docs every day. Lawyers and VCs, on the other hand, do. Plus, market terms change over time (even within a period of a few months). In any case, utilize the Internet, books, and informal networks to gather as much baseline info as you can. Brad Feld looks like he has some good upcoming posts on the subject of term sheets.

As a closing thought, to start to get familiar with the general idea of term sheets, the AllBusiness website has a vanilla short form agreement and long form agreement on the web (not the only source and not necessarily the best source but instantly accessible and another data point for you).

Steve Shu
Managing Director
S4 Management Group

Posted by sshu-s4 (c) S4 Management Group LLC at 12:01 AM CST
Updated: January 4, 2005 11:25 AM CST
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