Small business growth: Three tips for negotiating with venture capitalists
These three tips can help you assemble a team of advisors to arrange the best venture capital deal for your business.
Venture capital can provide funds to help fuel small business growth. But it's different from other types of financing like loans. Venture capital comes with tradeoffs — primarily in the form of giving up some ownership of your business in exchange for a capital investment. That could mean company shares or an active role in running the business, such as a seat on the company's board.
Armed with a savvy team of professionals, you can negotiate the best possible deal for your business. Here are three tips to help assemble your dream team and strike the best deal.
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Tip #1: Hire a good attorney
Venture capitalists negotiate for a living, so you may need an attorney who is savvy with complex transactions and familiar with venture capital documents like a term sheet, which summarizes the critical aspects of the deal. "A lawyer should be your first external team member," says Stewart Alsop, partner at venture capital firm Alsop Louie Partners in San Francisco.
A good corporate lawyer can provide valuable advice and counsel, as well as prep you for the negotiations with venture capitalists. If you don't already have an attorney, ask people you trust for recommendations and interview potential candidates. Here are a few questions to ask a lawyer:
Are you experienced?
Have you negotiated with venture capitalists?
Do you have other clients in my industry?
Will you be flexible in your billing?
The last question is particularly important for startups, which may not have the cash upfront to pay hefty lawyer fees. Most importantly, you should feel comfortable with and trust the attorney you chose.
Tip #2: Enlist the help of a CPA
It's also important to have a financial advisor on your team — someone who can discuss financial statements, provide projections, and help assure potential investors that the business has growth potential. If you don't already have a savvy financial professional on your team, you might consider hiring one or enlisting one to sit on your company's board of advisors.
Here are a few questions to ask when interviewing a financial advisor:
What do you charge?
What are your credentials?
How much experience do you have?
Can I get references from other clients?
Tip #3: Build a strong relationship
A lawyer and a financial advisor are key, but the most important person on the negotiating team is you, the business owner. "There is only one member of the team from the venture capitalist's point of view," Alsop says. "If they are not talking to the founder or the CEO, there is no deal to be done."
Potential investors — whether private investors or venture capital groups — will want you to have a good business plan and projections for future growth to ensure that their investment will provide a solid return. "In venture capital, you are making a deal with an investor to grow fast," Alsop says. "It has to be a partnership between the two companies."
Oftentimes, the best deals come down to the relationship between the business owner and the investor. "The issues that usually come up between investors and the company don't focus on ownership, but on how well the investor gets along with the entrepreneur, how well they understand each other's business, and how well they cooperate," he says.
Surrendering partial control of your business to a venture capitalist may be a small price to pay to take your business to another level. But with the right information and team in place, you can help ensure the best deal for all involved.
Learn more about how to determine which financing option is best for you.