TIPS ON SURVIVING YOUR FIRST VENTURE DEAL
By James Verdonik

In the last six months, you have ...

... selectively sent your business plan to numerous venture capital investors
... made formal presentations at several venture capital conferences
... met with partners of a dozen venture capital firms to discuss your business plan
... been subjected to intensive due diligence by three venture capital firms
(they now know more about you than your family knows)
... been working without salary for nine months and are now over the limit on all your credit cards
... received a term sheet from one venture capital investor

Welcome to the world of venture capital deals.

The things you should know before you start negotiating your term sheet include:

• You cannot spend a term sheet. You should assume it will take at least eight weeks after receipt of the term sheet until you close a deal and receive money, unless the investor provides you with a bridge loan. Taking a bridge loan can adversely affect your valuation.
  
• Most venture deals that reach term sheet stage eventually close, especially if extensive due diligence was done before the term sheet. Venture investors do, however, sometimes back away from a deal at or after the term sheet stage.
  
• Valuation is sometimes the first term agreed. Sometimes valuation is the last term. Often the investor and the company agree on an acceptable range of valuations early on, but do not finalize a specific valuation until later. Do not rush to agree on valuation.
  
• Remember that the pre-money and post-money valuation are only one of a half dozen provisions in the term sheet that affect how the dollars will be divided on a sale or IPO of your company. Focus on these other value related provisions as closely as you do the valuation numbers.
  
• Most venture backed companies are sold and do not do an IPO. Focus on how you and the investors will divide the proceeds of sale of the company.
  
• If you are not an internet company, do not expect to get the same valuation as an internet company. It may or may not be justified, but many investors are now willing to pay an internet premium.
  
• Although it is fair game to point out to investors the internet implications of your company, you are unlikely to succeed in getting an internet premium if your company does not have a strong nexus to the internet.
  
• Try to find comparable companies in your industry and find out their valuations at your stage of development. Having a CEO who has made money for investors in prior companies is an asset that should be included in valuation. Barriers to entry by competitors, such as strong patents, should also be included in valuation. Document why the assumptions you are making in your projections are realistic. Do all these things, but remember that virtually all valuation negotiations are affected by subjective factors, such as the relative eagerness of the two sides to get the deal closed.
  
• 75% of a venture term sheet is standard. Do not waste time and effort resisting the inevitable.
  Instruct your legal advisor to tell you what points are standard and what points are negotiable and your options for each negotiable point.
  
• Understand the implications of each alternative. Instruct your legal advisors to explain with concrete examples how each alternative in the 25% of negotiated terms will either benefit or harm you. Do not be satisfied with generalizations from your advisors.
  
• Negotiate the term sheet directly with your venture investor. Do not negotiate through your lawyer. Your lawyer can play a more direct negotiating role when you move from the term sheet to definitive agreements. You need to evaluate the chemistry between you and your investor under the pressure of negotiating the term sheet before you marry the investor. If the chemistry is not good, it is usually a mistake to accept the investment.
  
• The venture investor, who may negotiate a new venture deal each month, knows the implications of venture terms better than you do. Consequently, in your direct negotiations you should tell the investor in advance that your agreement on any terms will be tentative until you confer with your legal counsel to fully understand its implications.
  
• Your negotiating ability is one of the most important job qualifications for running a company. The venture investor will be evaluating your negotiating skills. Generally, investors want negotiators who focus on the most important points and close deals without being delayed by less important issues. Consider your negotiation on investment terms an interview for the job of running your company.
  
• Negotiating a term sheet can be a positive experience that contributes to building a positive long term relationship between the founder and the investor, or it can set the tone for the beginning of a negative relationship. You have worked too hard to get to this point to have this be the start of a negative relationship.