Nivi · May 31st, 2007
Dharmesh Shah recently wrote a very nice review of Venture Hacks. The article includes great meta-advice about fund raising:
“1. VC Negotiation Is An Art Form: As an entrepreneur, there are few things more “nuanced” that you’ll deal with than raising institutional capital. Even if you decide not to raise venture capital, a lot of these skills and deal-terms will likely show up in other dealings you have (strategic partners, M&A transactions, etc.).
“2. The Devil’s In The Details: Most entrepreneurs focus too much energy on the “obvious” things like valuation. Fact is, there are other, non-valuation terms in the VC deal (vesting, stock option pool, liquidity preferences, etc.) that have a significant impact on the economics of your deal. It’s easy to lure yourself into thinking you should solve for the highest valuation. But, in most cases, that’s sub-optimal.”
I would go even further: non-valuation terms are more important than valuation. Valuation is temporary, control is forever. If you don’t control your future, your current valuation is irrelevant.
Your current valuation is irrelevant if you are terminated and you lose all your unvested stock. Your current valuation is irrelevant if the board forces the company to raise a low-valuation Series B from existing investors by rejecting offers until the company is almost out of cash.
“3. Great Advice Is Hard To Find: As it turns out, good advice in the VC business is hard to find. I would define good advice as a combination of competency (i.e. well informed) and objective (i.e. non-conflicted). You can get close sometimes (via lawyers, advisors, etc.) but it’s really hard to find great advice.”
The amount of advice on entrepreneurship on the Web is exploding. Some of it rocks. Some of it sucks. Advice is only as good as its source. Our source is me and Naval—we’re trying not to suck.
“4. It’s Not Enough To Be Smart: It’s important to remember that regardless of how smart you are, VC negotiation is not just a matter of raw intelligence. Sure, it helps to have a few brain cells to understand the dynamics of a deal, but a lot is hidden away in the dark corners that you only ever learn by doing it. It’s also important to remember that the VCs do this for a living. Hopefully, you don’t (you’re building businesses for a living). You may be twice as smart as they are, but you’re still at a disadvantage. Try to even the playing field as much as you can.”
Dharmesh’s site, On Startups, is a great resource for entrepreneurs.
Topics Negotiation · Resources
Great post Dharmesh. My favorite quote is “Valuation is temporary, control is forever.” It reminds me of the MasterCard commercials for some reason. Something like Valuation: $10/share, valuation for next Down-round: $8/share, Co-Founders salaries: $0, control of your own company: Priceless.
Anyway, sorry for the digression. I completely agree that the devils in the details. If you want to out-trick a trickster (VC), make sure you study up on all the terms that can be manipulated against you. If you’re a legal retard, make sure you learn it and make sure you have company counsel that can advice on the structure of any VC term-sheet. That’s what we have and I used to be legally challenged. Under no circumstance should you take any terms as “given”. Ask questions and make sure you completely understand the language and implications of it. Nobody will have your best interest in mind except for you. That’s coming from a less-than-average paranoid entrepreneur! But it’s the truth. In business as in the VC world, if somebody can take advantage of you with information they have and you don’t, rest assured they will. Good news for all us Entrepreneurs is that we can read this blog (and others like it) and consult with legal counsel to learn the ins and outs so we’re not completely blind-sided. Thanks for the refreshing post!
JT