Tips On Venture Capital Deal Terms - Part OneBefore we discuss deal terms, let's discuss when you should ask potential investors about "deal terms". This applies to Hedge Funds, as well as private equity firms and venture capital firms. I always recommend that my clients prepare a separate Executive Summary to save them time screening potential investors and to protect some of their confidential information. You can weed out funding sources who will waste your time by first sending them your Company's
Executive Summary
instead of your full Business Plan. The time you spend working on raising capital and meeting with potential investors is valuable. Use it wisely and try to find your best candidates for funding quickly. Concentrate your efforts on them. Remember, venture capital firms usually focus their funding efforts on start-up companies and private equity firms usually focus their efforts on existing companies. Some very successful Hedge Funds have become hybrids, meaning they look at private and public companies, start-ups and existing companies. Some online sources can be very helpful and save you significant time in your quest for capital. Here's a link to a funding group (private equity/hedge fund) that offers negotiable Deal Terms and can usually make a prompt decision on funding. They will consider various types of funding such as equity, asset based, a combination of debt and equity, bridge loans and reverse mergers. Click here: Funding Source Once some investors have expressed interest and want to see the full Business Plan you need to do 2 things before you send it to them: 1. Ask them to sign a Confidentiality Agreement, if you in fact have confidential information in the business plan. Most businesses will have something confidential they don't want everyone to know, especially their competitors. It actually might seem a little odd to a potential investor if you don't ask them to sign some form of confidentiality agreement. 2. Ask them about their basic financing structure. They may tell you something you don't want to hear. Maybe they want you to go public within 1 year of funding. Your Management Team, however, was counting on a buyout by your main competitor. If that is the case, then save yourself the time of sending that potential investor your full business plan. Venture Capital Firms will more likely dictate the terms of the financing and you may have very little room to negotiate. They do offer large amounts of capital if the decide to fund your company, but they expect alot in return. Also, your Management Team may have to give up voting control. So find out in advance before you spend too much time with one Venture Capital firm that has demands that are clearly unacceptable to your Management Team. Angel Investors on the other hand may ask you to give them a term sheet. It will be much easier to negotiate with them, that's why they call them Angels. And although they will conduct thorough due diligence it will be quicker and less painful than the grilling a Venture Capital firm will put you through. No matter what anyone says, deal terms are almost always negotiable, YES, even with big venture capital or private equity firms. How much you will be able to negotiate with them is another story however. For instance, you may be able to negotiate small points, like 8% interest instead of 9% interest, but you won't be able to talk them down from 30% equity ownership down to 20% equity ownership. Board membership is another item left open for negotiation. Some large firms like to start out with 2 out of 5 board seats in your company, but if the company doesn't hit certain milestones in terms of gross and net revenue, then they can ratchet up to 3 out of 5 board seats, which means you can potentially lose control of your company.
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