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Blog postCapital RaiseFP&A

Successfully Negotiating VC Termsheets

While advising our client on their fundraising process, we helped them increase their valuation by 80% and double the capital raise

Most founders are not deal makers. In contrast, most investors are highly experienced deal makers.

One of our Client Companies received a term sheet from a well-known VC in the industry. The VC was the client’s top pick as a potential investor. The Company was very excited; receiving investment from such a prominent firm would provide strong validation in the industry. However, the valuation was significantly lower than what they were expecting.

The client only had one term sheet from this specific investor and was in dire need of a cash infusion to maintain its fast growth trajectory. Discussions with other investors were lagging, with an unclear prospect of materializing into serious interests.

This is a weak hand. In traditional negotiation terminology – what is your BATNA (Best Alternative To a Negotiated Agreement)? The Company’s was perhaps none existent, at best weak. But as Adam Grant, the renowned Wharton professor, advocates, “The science of the deal reveals that great negotiators refuse to believe in a win-lose world. They care about both results and relationships. They don’t declare victory until all parties win.”

If valuation becomes the sole focus it is difficult to gain leverage in this situation. The Company effectively refuted the VC’s valuation approach and explained why it was too low and unreasonable. The VC did not push back on the Company’s logic, but their lack of push back did not mean they accepted the Company’s higher valuation.

The key to gaining something in this type of discussion is identifying other issues that matter to the investor. For investors, it is very rarely just about valuation.

How does one identify these issues? Astute observations are required about what the investor says and what they do. Asking the right questions can reveal hidden information. It would be so much easier if everyone were open and transparent but that is seldom the case.

Through multiple calls, emails and in-person discussions with the investors, using thoughtfully prepared scripts, talking points and Q&A, the Company was able to glean insight into the investor’s needs and pain-points. Ultimately, the investment dollar amount was an important factor for this particular investor. In summary:

  • The Client’s concerns and initial reaction:
    • The low valuation would result in too much dilution
    • They needed the cash, but considered a smaller fundraise to reduce dilution
  • However, when the VC’s desires are factored in (which was never revealed explicitly)
    • Even if the same valuation is maintained and the investment amount is reduced, the VC would be unsatisfied (it would be net-worse for them)
    • Instead, the Company asked for more investment dollars if the VC met the Company halfway on the valuation bid-ask spread

The investor accepted this proposal and the client ultimately secured an 80% higher valuation with double the funding amount. The increased funding amount gave them a much longer runway compared to the initial term sheet. There was a more complicated structuring that allowed both parties to claim a victory here, the details of which will not be discussed for this case study.

Conclusion

To be an effective Capital Raise Advisor it is critical to have a broad range of experiences across diverse situations. Such breadth of experiences develops an understanding of the various hidden levers that motivate each party when “Valuation” is the issue on the surface. With a cool rational mind, an effective Capital Raise Advisor is able to identify those hidden levers and find a path where “All parties win.”

Transaction negotiation is not like playing poker. Bluffing and lying are not a strategy. That was a clear rule at Goldman Sachs. When communicating with the counterparty, every word must be chosen very carefully, but one must never lie, deceive or cheat. Building trust in negotiations allows for a win-win outcome. These skills were learned from the savviest deal makers at Goldman Sachs and practiced in numerous real-world situations.

Key Takeaways:

  • Fundraising is a daunting process and not an entrepreneur’s core skill set. But it is Embarc Advisor’s bread-and-butter and what we do every day. We give you the leverage to focus on your core business while guiding you through this turbulent journey.
  • Our goal is not just to get you funding, but to get you the best possible deal. Too many founders let their guard down when they receive a term sheet from a leading VC. We are going to negotiate an amicable win-win outcome until the very end.

Our Qualifications:

  • As former bulge-bracket investment bankers at Goldman Sachs and Morgan Stanley, we have executed +$50 billion in capital market and M&A transactions.
  • We have successfully raised VC funding for our own startups and successfully advised several startups in the past two years as independent fractional CFOs and consultants.
  • We have a strong understanding of accounting and FP&A. We also bring a strategic perspective. Combined, we offer the strategic finance capabilities exclusive to Unicorns and public companies.
  • We are uniquely positioned to negotiate against experienced deal-makers (e.g., venture capital, private equity investors). We have successfully advised negotiations on both sides of the table.

See the Difference that Embarc Advisors Can Make for Your Business

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