Deepak Malhotra

A few years ago a venture capital firm hired me to help one of its start-ups negotiate a critical deal. I expected the VC partner who was on the start-up’s board to be deeply involved in the strategic discussions. But the VC in question—ordinarily a hands-on dealmaker—was conspicuously uninvolved. His advice and support would have been useful to the founders, especially with respect to opening doors with governments and potential partners overseas, so one day I asked him about his seeming lack of interest.

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Reprint: R1305F 
VC&#8211;entrepreneur partnership agreements often contain flaws that become highly damaging as the parties come up against issues of power, trust, and much more. Yet many of the flaws are systematic and predictable&#8212;and hence preventable. The author, a longtime consultant to the VC industry, outlines four recommendations for entrepreneurs sitting down at the table with prospective funders. 
Understand your leverage. Your leverage is not only a function of your alternatives; it has a lot to do with the VC&#8217;s as well. Seek to understand them, and be prepared to educate the VC about why his exercising too much power could hurt both parties in the long term. 
Maximize trust. Beneath all the financial projections, the VC negotiation is a process in which people are deciding whom they want to associate with for years to come. If the VC is vulnerable, use the opportunity to build trust rather than to take advantage. 
Focus on value&#8211;not just valuation. Nonfinancial considerations such as control are also important. 
Strive for understanding. Seemingly abstruse provisions can be highly consequential. And bear in mind that the choices a VC makes when negotiating can contain important clues about her assessments and expectations. 
Above all, when you&#8217;re negotiating with a VC, think not only about what will look good in a press release today but also about what will help you create and capture value over the long run.

How to Negotiate with VCs

Reprint: R1305F VC–entrepreneur partnership agreements often contain flaws that become highly damaging as the parties come up against issues of power, trust, and much more. Yet many of the flaws are systematic and predictable—and hence preventable. The author, a longtime consultant to the VC industry, outlines four recommendations for entrepreneurs sitting down at the table with prospective funders. Understand your leverage. Your leverage is not only a function of your alternatives; it has a lot to do with the VC’s as well. Seek to understand them, and be prepared to educate the VC about why his exercising too much power could hurt both parties in the long term. Maximize trust. Beneath all the financial projections, the VC negotiation is a process in which people are deciding whom they want to associate with for years to come. If the VC is vulnerable, use the opportunity to build trust rather than to take advantage. Focus on value–not just valuation. Nonfinancial considerations such as control are also important. Strive for understanding. Seemingly abstruse provisions can be highly consequential. And bear in mind that the choices a VC makes when negotiating can contain important clues about her assessments and expectations. Above all, when you’re negotiating with a VC, think not only about what will look good in a press release today but also about what will help you create and capture value over the long run.

How to Negotiate with VCs

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