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Investment InformationVenture Capital Negotiating Issues
by:
Dave Lavinsky
Once
companies enter into negotiations with venture capital firms, there are some issues which need to be defined and united
upon. This article describes the key issues.
Valuation. Valuation is the most prominent negotiating issues. Valuation is the cost of the institution in which the venture capitalist invests. Valuation determines what pct of the institution the capitalist
is purchase
for their capital.
Timing of the Investment. Many a investors wish commit a large figure of capital, but wish contribute that capital to the companies in installments. Often, these installments are only ready-made once
pre-designated milestones are met.
Vesting of Founders' Stock. Like capital, investors often prefer that stock is given to institution founders and key employees in installments. This is best-known as vesting.
Modifying the Management Team. Several investors insist that additional or substitute management employees be hired ensuant to their investment. This gives investors additional safety that the institution wish execute on its business model. An important issue to discuss with regards to modifying the management team is the figure of stock or options that wish be issued to new management team members, as this wish dilute the holdings of the founders.
Employment Agreements with Key Founders. Venture capitalists typically do not want companies to have employment agreements that limit the circumstances under which employees can be dismissed and/or set compensation and benefits levels that are too high. Different key employment agreement issues to be negotiated with venture capitalists include restrictions on post-employment activities and worker
severance payments on termination.
Company Proprietary Rights. If the institution has an important product with intellectual property (IP), investors wish want to ensure that the company, and not a institution employee, owns the IP. In addition, investors wish want to ensure that new inventions be appointed
to the company. To this end, investors may discuss that all employees must sign Confidentiality and Inventions Assignment Agreements.
Exit Strategy. Investors are really focused on how they wish “cash out” of their investment. In this regard, they wish discuss regarding registration rights (both demand and piggyback); rights to participate in any sale of stock by the founders (co-sale rights); and possibly a right to force the institution to redeem their stock under certain conditions.
Lock-Up Rights. Venture capitalists may require a lock-up period at the term sheet stage. The “lock-up period” is typically a 30-60 day period wherever
the investors have the exclusive right, but not the obligation, to do the investment. Investors typically conduct due diligence during this time without fear that different investors wish pre-empt their possibility to invest in the company.
Each of these issues are critical once
raising venture capital, since the outcome can importantly
impact the success of the venture and the wealth potential of the institution founders and management team. Because venture capitalists are really knowledgeable regarding these issues, and have great skill in negotiating on them, companies who are raising venture capital should seek advisors who as well have this experience and expertise.
Just about the author:
GT Business Plans has developed over 200 business plans for clients that have conjointly raised over $750 million in financing, launched many
new product and service lines and gained competitive advantage and market share. GT Business Plans is the sister site of GT Venture Capital
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