Thursday, July 26, 2012

First Steps in Raising Capital (Part 4)


The Fourth article in a special 4-part series.

6th Advice – Focusing on terms rather than valuation:

Delay agreeing on the key terms of the deal until the discussion nears conclusion.  The funding process can take a long time, and if your company’s value has increased, you will not get a better price. On the other hand, if your company decreases in value, be prepared to negotiate under harsher terms. 
  • Most companies in their first venture rounds are not profitable and somewhat risky.  The longer the process, the safer it is for the VC.  Long processes, however, can erode your resources and decrease your leverage.  Keep the momentum going!

When negotiated correctly, the terms of the deal will likely be more important than the price per share (a.k.a. the valuation).  Trust me on this one. Things like liquidation preferences are critically important to small and medium sized companies looking to exit. Veto power can prevent you from selling when you think the time is right; or keep you from going after new markets.  Signature rights can limit your ability to hire and fire employees, or get approval on certain expenses.  Companies can be undervalued or overvalued, and both can kill a deal from the get-go. Choosing the ideal valuation is obviously a critical issue, one which we will address in another post.

These terms can render you as a semi-employee of the VC firm. These conditions and many more “little” things can be explained away by the VC during the negotiation, but they will likely reduce your quality of life and hamper your ability to be a “fearless leader.”  The goal is to get the VC to trust you and let you run the company.  Make sure you understand what's most important to you, and respect what’s important for the VCs.  My advice: don’t be a pig on the valuation, be smart on the terms. 

7th Advice – The negotiating phase:

Raising venture capital is a process that requires nerves of steel. 
  • Start the process long before you actually need the money.
  • Be particularly sensitive to closing signs.  You may assume the deal is moving forward while the VC is ambivalent about investing.  Don’t waste your time, effort or money.
  • As a founder, the process is often nerve-wrecking.  The Deal can fall-through in the last minutes of   negotiation.  During the process, it’s very easy to get cold feet, be discouraged or lose momentum.  Don’t fall into these traps.
  • Watch your ego, and be prepared for some stressful days. Don’t lose your self control.
  • Start the process off with a few funds at the same time, and don’t feel guilty about it.
  • Always consult with your mentor(s) AND other experienced people you trust.  Integrate and optimize the feedback. Don’t rely on the views of any one person exclusively.
 There's more to come, but you are most welcome to bring up any subjects that you want to be covered ….

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I founded and ran 2 companies, www.fiftyone.com and www.payoneer.com . Between both companies we have raised US$41million in 16 rounds from 9 VCs and 40 angels. Both companies are now profitable with revenues that exceed $100MM USD

12 comments:

  1. Correct negotiation is very important for the deal. Thanks for sharing such useful tips.

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  2. I think that what Yuval Tal is saying is correct, you don't want to make it seem like you are eager for the competitor to make a deal and in certain situations it is usually better if you have an experienced person in whom you trust there to go over these transactions with you.

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  3. This is a great article. I'd like to increase the capital. I have learned a lot from it.

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  4. Great and useful tips to raise the capital. All business persons must follow this..

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  5. thanks for sharing this useful article, but these companies must provide insurance for their investors.

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  6. an article like this is really helpful to those who want to venture into business, especially those who are new. this indeed will help out in deciding how to do about with a venture which is being planned.

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  7. I've also read other from this series great work by author.
    Thanks for sharing info.
    looking forward to it.

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  8. The discussion became even better, more enlightenment on raising capital.. The 7th advice is really helpful.Thank you.

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  9. Both the idea are better one to implement to and believe it good to have them. I belive every company first need to focus on the terms as you said rather then what they value may be. Also company should be caution about them.

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  10. Hello admin,
    That's a great article and well explanatory. I will definitely come back to your blog on regular basis. All the best.

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  11. i like your blog
    keep up the good work.

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