Venture Capital Negotiating Issues

When 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 the company in which the venture capitalist invests. Valuation determines what percent of the company the investor is buying for their capital.

Timing of the Investment. Many investors will commit a large amount of capital, but will contribute that capital to the 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 to 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 the 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 want companies to have employment agreements that limit the circumstances under which employees can be fired and/or set 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 the company has an important product with intellectual property (IP), investors will want to ensure that the company, and not a company employee, owns the IP. In addition, investors will want to ensure that new inventions be assigned to the 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 the 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 the 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 the 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.

Since its inception, Growthink Business Plan Development has developed over 200 business plans. Growthink clients have collectively raised over $750 million in financing, launched numerous new product and service lines and gained competitive advantage and market share. Growthink has become the firm of choice for venture capital firms, angel investors, corporations and entrepreneurs in the know.

For more information please visit http://www.growthink.com or visit our venture capital site at Growthink Venture Capital.

---

Entrepreneurial Hate, its out there

Today, I got an email from a lady who hates... Read More

Angel Investors: 7 Online Business Plan Scams and 1 Real Deal

We've all seen the hype: "We'll put your plan in... Read More

Key to Starting Your Own Clothing Company

Starting your own private label clothing company is not as... Read More

Do You Have What It Takes To Be An Entrepreneur?

Q: I am interested in starting my own business. I... Read More

Beware the Opposition!

Any time you make changes in your life you are... Read More

Selecting a Venture

The basic rule is simple: "Find a market need and... Read More

What is Entrepreneurship?

In discussing entrepreneurship and writing articles on the subject, I... Read More

Independent Auto Detail Shop VS Biz Op or Franchise

Owning a detail shop can be an exciting and rewarding... Read More

Should You Write Your Own Business Plan?

If you are just starting a company and looking for... Read More

Entrepreneurship Story; Over Regulation in Franchising Part I

Jim and Sally run a successful auto business, which they... Read More

About Ending Competition

1. Why should I not compete with others?The very concept... Read More

Financing Your Business

Anyone who is serious about making some money is already... Read More

Outcomes - Thats What You Need to Focus On

Successful business owners and managers need to be very clear... Read More

Why I Should Go In To Business

Rohit Kochgaway was very upset with his boss for his... Read More

Could a Book About Your Company be Worth $1.7 Billion? Building Value Through Publishing

"Berkshire Hathaway (NYSE: BRK.A) to purchase Clayton Homes for $12.50... Read More

Strategies for Overcoming Obstacles to Discovering Your Gifts

What are the unique gifts that differentiate you from other... Read More

Entrepreneurship as Your Passion

Entrepreneurship has been my passion for as long as I... Read More

An Entrepreneurs Biggest Cost

When launching a new product or company, an entrepreneur must... Read More

From Entrepreneur to Infopreneur: Make Money Selling Info Products

The term "Infopreneur" is a relatively new industry buzz word... Read More

How You Can Earn $1000 A Week Part Time

About 6 years ago I started to notice that certain... Read More

Ancient Warrior Secrets For The Modern Entrepreneur

The words you see onscreen trigger subconscious responses. Dark images... Read More

Rx for Falling Corporate Profits

Once again the squeeze is on as renewed inflation worries... Read More

Customers - Why Should They Buy From You?

There are a whole range of reasons why customers buy... Read More

Entrepreneurship: Insight and Closer Look At The Entrepreneur

Life as an entrepreneur is the American Dream. To be... Read More

Everything You Wanted to Know About Public Domain Info, but Were Too Afraid to Ask!

What to Look Out For:Copyright - you absolutely must check... Read More

Getting Rich Isnt a Bad Idea

You've seen plenty of articles claiming to offer you the... Read More

Entrepreneurs - 9 Top Mistakes to Avoid

1. Isolating Yourself When setting up a business, you can... Read More

Dream It, Create It, Become It! Design a Dream Board

Have you ever heard of "Dream Boards" or "Treasure Maps"?... Read More

The Six ?F? Words Every Entrepreneur Should Know

Start your own business, and soon enough, you find yourself... Read More

Cut to the Quick - What is an Entrepreneur? The Inside Story

Enjoying the title of entrepreneur is a hollow feeling.If you... Read More

Something From Nothing, With Something To Share

Betrayal, it can hit you like a load of bricks... Read More

Entrepreneurship: What does it REALLY mean?

Introduction:In a world where ideas drive economies, it is no... Read More

Leadership Attributes for Business Success

Business success is essentially the result of successful leadership. Contrary... Read More