ICON66 – Volume 6
VC Funding – 10 Hot Tips
OK! The deal is hotting up, you have some strong interest from the VCs and it's getting down to the serious bit. Initial soundings from your favoured VC have indicated a deal is ready to be developed.
So what's
the deal?
To close, a
raft of terms
will need to
be discussed
and agreed.
Enter the "term sheet" negotiations:
VC Funding
OK! The deal is hotting up, you have some strong interest from the VCs and it's getting down to the serious bit. Initial soundings from your favoured VC have indicated a deal is ready to be developed.
So what's
the deal?
To close, a
raft of terms
will need to
be discussed
and agreed.
Enter the "term sheet" negotiations:
HOT TIP
NO 1
During
the deal, get
rid of all
ambiguity and
ensure both
parties have
heard the same
thing.
To use a simple,
but real, example;
if an investor
has said: "We
would be looking
to secure between
25% - 30% of
the equity",
the VC will
be thinking
a 30% stake
has been agreed
and the investee
company will
be thinking
25% has been
agreed. Common
sense I know,
but generally
common sense
can be one
of the first
casualties
of deal negotiations.
HOT TIP
NO 2
Keep the deal
terms simple.
Avoid ratchets,
numerous different
classes of
shares and
numerous different
types of financial
instruments.
There is absolutely
no reason for
complex and
complicated
deal structures.
HOT TIP
NO 3
Always deal
with integrity,
transparency
and confidence
to build trust.
This is a two
way street
and working
through the
term sheet
negotiations
gives both
parties a feel
of what it
would be like
to work together.
HOT TIP
NO 4
As you are
dealing with
these negotiations,
ensure that
the business
continues to
deliver. If
it doesn't,
at worst the
investor pulls
out, at best,
the terms are
re-negotiated
downwards.
HOT TIP
NO 5
Always be on
the top of
your game.
Throughout
this negotiation
process the
investor will
be evaluating
how well you
perform under
the strains
and pressure
of the deal.
HOT TIP
NO 6
Understand
the investor's
process - a
term sheet
is not a "completed
deal".
VC investors
are accountable
to their own
investment
committees,
so understand
their internal
processes and
ensure you
know what lies
ahead in terms
of investment
committee'
approval plus
all the due
diligence processes
that need to
happen before
a deal can
be completed.
HOT TIP
NO 7
Keep the exclusivity
period as short
as possible
and don't agree
to exclusivity
with a VC unless
you are satisfied
you have addressed
all the details.
If a deal collapses
once you've
gone exclusive,
it's a very
long way back
and near impossible
to regain interest
from the nextbest
preferred VC.
HOT TIP
NO 8
Don't take
weeks negotiating
the term sheet.
Keep strong
momentum in
the deal and
try and get
this stage
completed in
sufficient
detail to enable
the deal to
move on to
the final stage.
HOT TIP
NO 9
Understand
your VC's position,
their risk
profile and
what they need
to achieve
to close on
the deal.
HOT TIP
NO 10
Keep a cool
head and always
engage with
advisers who
know what they
are talking
RED HOT ADVICE
about - a lot
don't.
