Whe.companies enter into negotiations with venture capital firms, there are several issues which need to be defined and agreed upon. This article describes the key issues.
Valuation. Valuation is the most prominent negotiating issues. Valuation is the price of th.company in which the venture capitalist invests. Valuation
determines what percent of th.company the investor is buying for their capital.
Timing of the Investment. Many investors wil.commit a large amount of capital, but will contribute that capital to th.companies in installments. Often, these installments are only made when pre-designated milestones are met.
Vesting of Founders' Stock. Like capital, investors often prefer that stock is given t.company founders and key employees in installments. This is known as vesting.
Modifying the Management Team. Some investors insist that additional or substitute management employees be hired subsequent to their investment. This gives investors additional security that th.company will execute on its
business model. An important issue to negotiate with regards to modifying the management team is the amount of stock or options that will be issued to new management team members, as this will dilute the holdings of the founders.
Employment Agreements with Key Founders. Venture capitalists typically do not wan.companies to have employment agreements that limit the circumstances under which employees can be fired and/or se.compensation and benefits levels that are too high. Other key employment agreement issues to be negotiated with venture capitalists include restrictions on post-employment activities and employee severance payments on termination.
Company Proprietary Rights. If th.company has an important product with intellectual property (IP), investors will want to ensure that th.company, and not .company employee, owns the IP. In addition, investors will want to ensure that new inventions be assigned to th.company. To this end, investors may negotiate that all employees must sign Confidentiality and Inventions Assignment Agreements.
Exit Strategy. Investors are very focused on how they will cash out of their investment. In this regard, they will negotiate regarding registration rights (both demand and piggyback), rights to participate in any sale of stock by the founders (co-sale rights), and possibly a right to force th.company to redeem their stock under certain conditions.
Lock-Up Rights. Venture capitalists may require a lock-up period at the term sheet stage. The lock-up period is typically a 30-60 day period where the investors have the exclusive right, but not the obligation, to make the investment. Investors typically conduct due diligence during this time without fear that other investors will pre-empt their
Opportunity to invest in th.company.
Each of these issues are critical when raising venture capital, since the outcome can significantly impact the success of the venture and the wealth potential of th.company founders and management team. Because venture capitalists are very knowledgeable regarding these issues, and have great skill in negotiating on them.companies who are raising venture capital should seek advisors who also have this experience and expertise.
About the author:
growthink.com GT Business Plans has developed over 200 business plans for clients that have collectively raised over $750 million in financing, launched numerous new product and service lines and gaine.competitive advantage and market share. GT Business Plans is the sister site of
gtsecurities.net GT Venture Capital
