Every beginner entrepreneur has a dream, but some dream big. They consider their small business as a new Uber or a new Facebook. To transform a sector or even the entire economy, they need money, a bundle of money. They must also grow as much as possible and conquer the market. There is always quite a bit of competition and in the end, often the winner takes it all. This is why, in the digital economy, entrepreneurs often have to share their dreams with investors. They finance the start-up losses, in the hope of collecting fully later, on a sale, an IPO or even in a bankruptcy if necessary.
Investors demand all kinds of guarantees and preferences to protect their interests between entry and exit. This framework of conditions seems to depend on valorization, but this is not at all the case. Much more than the shareholders’ percentages, these conditions determine the balance of power. Mark Zuckerberg, for example, has total control over Facebook, although he holds only a minority of shares. For WhatsApp, with no significant turnover, he alone concluded a $ 19 billion monster deal. It can impose acquisitions of this magnitude. Its first investors, when it was only about twenty years ago, left Zuckerberg control over the board of directors, a control he never gave up afterwards. As a result, it also gradually consolidated its hold, in particular via multiple voting shares.
Zuckerberg is of course an exception. Most entrepreneurs, worldwide, are in a worse exit position. Instead of asking, they must put some water from their wine. But long-term foresight negotiations can, even in such cases, make a world of difference.
1. Think before You Start
Entrepreneurs have every interest to think twice about their real need for venture capital. An investor will almost always demand some control and oversight, and entrepreneurs must be able to manage that. External capital also creates extra pressure, be ready to do the impossible if it’s necessary.
2. Valorization is not an exact science
The valuation and the sum to be harvested define the margin of negotiation during a raise of the capital. Valuing an idea or a firm is not an exact science, but the framework of conditions often gives an indication in the event that one aims too high. My advice: Moderate yourself, your ego should never take the upper hand! For example, they will demand a multiple of their investment, not in proportion to their participation in the company. It is sometimes difficult to digest, for entrepreneurs, because their startups are their baby.
3. Do your Math
Often start-ups get their first funds within the private circle or from angel investors, often former wealthy entrepreneurs. For the biggest capital raising, from a million $, the bullet is usually in the camp of conventional risk capital funds. The problem of start-ups is that sometimes they lose sight of the fact that these funds have a limited life span. Most of the time venture capitalists take about five years to invest, so they have to be able to harvest in a relatively short period of time. That’s why the cycle of an investment fund may come out more quickly, even though in the negotiations they think they are entering for the long term. For a good preparation, a start-up has interest to learn about the current practices and the future situation. Learn to predict the future in a way to minimize the losses.
4. Don’t wait for gifts
Investors and their funds are generally in a comfortable position; they can sometimes impose things that put the risk entirely on the founder’s side. I am investing personally and I would like to do it in a founder friendly way, in the long run, it’s better for everyone because a company can only flourish if the founders feel supported and valued.
Crushing an entrepreneur is not in the investor’s advantage, however don’t wait for gifts. Venture capitalists are not chorus children, they earn money by being successful with companies, but their profit is sometimes at the expense of the company. The reason why I am not a fan of exclusive negotiations, in which case an investor can drag the procedure until he finds something in the accounts that compresses the agreed valuation. Is encouraged to continue to invest, and the money comes in, weakening the bargaining position, which is why it is always better to negotiate with at least two investors at a time.
5. Lift only what you need
It is understandable that you want to be sheltered for a long time. Raising money requires a lot of time and every entrepreneur prefers to devote this time to his company. But at the same time it is often more judicious to work in stages with a smaller amount on reasonable terms, the company may first reach a higher level, in order to then be stronger for the next fundraiser. Only raise the money you really need, even if investors come out an offer you cannot refuse, because there is still an alternative, you can give investors the choice to enter again later with new terms, your terms !
6. Stick to a simple structure
I recommend to every entrepreneur to avoid as much as possible structures with several kinds of actions. If you have a stock investor who already has shares with preferences, a new investor will also want to. The entrepreneur is always pushed a step further. An investor can perfectly have the money and as a business creator, I prefer to fight for the simplest structure possible, so that no distortion appears.
7. Show weaknesses
There are many similarities between looking for investors and looking for a lover. Both of them have to fall in love with, and who says love, say weaknesses. a lot of startups making the mistake of over-watering things down, which is paid as soon as an investor feels deceived. The biggest investors insist that risk be included in the agreement. However, in the long run, this is also in the advantage of startup. The problems that arise after the deal, but which have already been taken in consideration cannot be used again to renegotiate the whole business.
8. Organize and clean up your data
Start-ups often do not care enough about their accounting and administration. From an operational point of view, it is not a good thing that the situation related to the amount of money returned is clear only after a few weeks after the end of the quarter. That can slow down the conclusion of the negotiations, because professional investors will always do a thorough accounting review and sometimes ask for accounting and other data about the company over the past years. If you can respond quickly you make a good impression and you get more value for yourself and your start-up.
9. Take care of your options
Start-ups often forget to include provisions on options in the investment agreement. In the beginning, 10% of the shares are generally reserved as options for the employees, but after a few years the option pool is fully traded by capital raising or all options are given, As the company loses a powerful instrument for attracting talent If you still want to issue new options it is often to the detriment of your own interest. This can be avoided by specifying that each time a new capital raises, the pool of options will remain at the agreed percentage.
10. Do not sign anything without legal advice
The last tip may seem like cream pie. But we insist that we too often receive start-ups who have already signed their term sheet, comparable to the compromise in a real estate transaction. My lawyer and I then often have moments ‘oh my God’, about the heavy concessions the founders made without suspecting it.
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