How do you close the deal and maintain a positive relationship with your investors?

Be flexible on valuation but have a reasonable number to say if you were asked. More than the number, your justification and proof for that number, draw investor's attention. Don't forget fit between your stage of growth and dilution. If there is no fit, you won't get a deal.

In 2023, I helped a car marketplace company raise $1.1 billion at a $7 billion valuation despite facing initial skepticism. They achieved this through: - Compelling market research: Highlighting the growing online used car market and their unique technology. - Benchmarking: Showing strong user growth and engagement compared to competitors. - Understanding valuation: Effectively communicating future cash flow potential using discounted cash flow analysis. Data suggests that startups raising capital for the first time experience an average ownership dilution of 20-30%. However, factors like industry, stage of development, and negotiation strength can significantly impact this percentage.

It doesn't matter what a founder thinks tof valuation. What matters is the calculation that drove the valuation - it could be a revenue multiple, comparative deals in similar space, defensible intellectual property, a solid customer base, or a combination. It all comes down to the operating plan and financial projection. A clear trajectory on how much capital is needed at what stage of growth and what impact it will have on sales will tell a compelling story that can convince an investor. Things have changed dramatically over the last 18-24 months in the VC space. More VCs are behaving like PE firms and asking for more ownership in the company. Founders should be prepared for more dilution than before for the same amount of investment

Got to know your worth and what you're willing to let go before jumping into negotiations. Valuation? That's what folks are willing to cough up for a piece of your biz. And dilution? Well, that's how much of your baby you're parting with when you dish out new shares. It's all about finding that sweet spot between snagging enough cash and keeping the reins on your company. So, hit the research, check out what other startups are up to, and wrap your head around valuation methods like discounted cash flow or revenue multiples.

The key takeaway, presented in clear and concise terms, emphasizes the importance of balancing funding needs with maintaining control. The article's strength lies in its actionable advice, prompting founders to conduct thorough market research, benchmark against peers, and grasp valuation methods. This empowers them to confidently enter negotiations with a realistic understanding of their company's worth and the equity dilution at stake. By demystifying these financial concepts, the article empowers founders to make informed decisions, ultimately contributing to the success of their ventures. This knowledge gap addressed makes it a significant resource for any entrepreneur navigating the fundraising journey.

I have negotiated several termsheets. Some term sheets made me open a champagne bottle and others have made me cry with disappointment. The biggest mistake a founder can make is to be myopic about the valuation. There are other more important issues such as liquidation preference (if the LP is 2X, in a down event, the investor will walk away with twice their investment even if it means nothing is left for common shareholders). Similarly, some voting rights can be structured to provide a lot of operating control to the investor and make the board almost irrelevant. An agreement in one round becomes almost the lowest bar for all future rounds. Negotiate wisely and hire a good lawyer. Its certainly worth it.

In 2023, food delivery startup DoorDash faced public scrutiny for aggressive terms imposed on restaurants in their early term sheets. These included high commission rates, restrictive clauses, and limited data access. While not legally binding, these terms served as the foundation for subsequent contracts, highlighting the potential consequences of signing without thorough understanding. Studies suggest that over 80% of startups raise capital through venture capital, with term sheets serving as the initial negotiation point. However, research also shows that a significant portion of founders (around 30%) lack adequate legal and financial expertise to fully comprehend the terms.

Closing the deal and maintaining a positive relationship with investors begins with understanding the term sheet. From my experience, carefully reviewing and comprehending the terms outlined in the term sheet is crucial for successful negotiation and alignment between both parties. Clear communication and addressing any questions or concerns upfront can help prevent misunderstandings and foster trust. Moreover, actively involving investors in the decision-making process and ensuring their voices are heard can strengthen the relationship. Regular updates on the company's progress and being responsive to investor inquiries further demonstrate a commitment to transparency and collaboration, nurturing a positive investor-founder dynamic.

Wrap your head around the term sheet—it's like the roadmap for your investment deal. It lays out all the important stuff: how much dough you're getting, what your company's worth, the type of stocks or shares involved, plus other nitty-gritty details like who's got a say on the board and what happens if things go south. Even though it's not set in stone, understanding it inside out is key 'cause it shapes your future as a founder. And don't shy away from seeking advice from pros like lawyers or mentors—they'll help you spot any sneaky clauses or tricky bits.

Term sheets aren't contracts, but they hold immense weight. This non-binding document outlines the investment's core terms, impacting your future as a founder. Understanding its contents is crucial: funding amount, company valuation, security types, investor rights, exit strategies, and more. Seek professional guidance from lawyers, accountants, or mentors to navigate potential pitfalls and ensure the terms align with your vision. Remember, a well-understood term sheet sets the stage for a mutually beneficial investment journey.

In 2023, used car marketplace Shift negotiated a $248 million acquisition by CarMax. Shift's CEO, Toby Gebhardt, publicly acknowledged investor pressure for a sale while emphasizing his focus on securing the best possible deal for his company and employees. This demonstrates the importance of both confidence and respect in securing a win-win outcome. Studies suggest that founders who actively prepare for negotiations, including researching comparable deals, establishing BATNAs, and practicing communication skills, achieve significantly better outcomes compared to those who enter them unprepared.

(a) Transparently discussing potential exit strategies can align expectations and build confidence. For a digital media startup, outlining potential exit scenarios during negotiations reassured investors of our commitment to providing a return on their investment, thereby fostering trust and respect in our relationship (b) Establishing regular feedback channels as part of the deal terms can ensure ongoing alignment and address any concerns proactively. In one of my investments, we set up quarterly review meetings as part of the agreement, which allowed both parties to openly discuss performance, expectations, and adjustments as needed, reinforcing a culture of respect and collaboration.

The timing of a valuation can be crucial. Assets or companies may have different valuations at different life cycle points or economic conditions. Unexpected and rare events, often called black swan events, can disrupt valuations. Investors may be willing to pay higher multiples for assets in a hot market than in a bear market.

A great founder is a great negotiator, who knows their worth and investors' interests and incentives. Before entering into a negotiation, it's important to write down why are you raising money (growth capital, investor network, their knowledge, etc) and why the investor is interested (IP, founder, customer base). Consider how low can you go before walking away (if that's an option) and how much flexibility the investor can show before they walk away. The amount of due diligence/time/resources an investor puts in before the term sheet is considerable and the sunk cost fallacy should not be underestimated. A great negotiator is also a great storyteller. Do not forget to remind the investors of a great financial outcome for both parties.

When you're hashing out deals with investors, staying confident yet respectful is key, even if you're feeling the pressure, especially when it's your first rodeo or the market's not playing nice. Aim for a win-win situation where both sides come out smiling. Don't be afraid to walk away if the deal doesn't sit right with your gut. Know your BATNA (best alternative to a negotiated agreement) and your reservation price (the lowest offer you'll take).

As illustrated by AlphaFund's recent experience, once an agreement is reached on the term sheet, it's like setting the stage for an epic journey. The contracts, such as the stock purchase agreement, shareholders' agreement, certificate of incorporation, and board consent, serve as the formal documents that seal the investment deal. These legally binding agreements ensure a strong partnership, propelling both parties toward mutual success.

In 2023, fintech startup Robinhood faced criticism for discrepancies between its initial term sheet and final contracts offered to early investors. This resulted in legal disputes and reputational damage. This example underscores the importance of careful review and clear communication throughout the contracting process. Historically, startup founders often lacked access to legal expertise and resources, leaving them vulnerable during contract negotiations. However, with increasing awareness of founder rights and legal complexities, the importance of professional guidance and thorough contract review is becoming increasingly emphasized.

Once you've hammered out the details on the term sheet, it's time to seal the deal by signing those contracts. These legal docs make things official and lay down the rules for both sides. You'll likely see stuff like the stock purchase agreement, shareholders' agreement, certificate of incorporation, and board consent. Take a good look at them to ensure they match up with what you agreed upon and that there are no curveballs. Get your lawyer and accountant to give them the once-over too. After all the ink is dry, it's time to break out the bubbly and celebrate your win. Don't forget to give a big shout-out to your investors for having your back! 🥂

Listen, I am biased. Term sheets are not entirely binding. So until the other documents like investor agreement have been signed... You don't have a deal. You have a hope. Get IT in writing, then celebrate. In. That. Order. Please and thank you. That's all.

The term sheet inked, it's time to translate its spirit into legally binding contracts. Remember, these documents hold immense power, outlining rights and obligations for both sides. Be meticulous! Scrutinize each phrase, ensuring alignment with the term sheet and absence of unforeseen surprises. Seek guidance from professionals; their expertise navigates legal intricacies and protects your future. Once the final signatures grace the paper, embrace the accomplishment! Celebrate your journey and express gratitude to investors for their partnership. Remember, this marks a significant step in your venture's growth, paving the way for exciting possibilities.

I have only known and practiced one principle in deal making viz be upfront, empathetic and transparent about your boundaries. Those who are opportunistic about being able to " get a good deal" now lose many later as the word gets around. Character rarely changes and I have seen many such VCs who "outplay" their own selves out of the market with sharp elbows and opportunistics manoeuvres. I want to create wealth and share it with others who helped me create it. This is my value system and I seek a similar match in my co investors.

Investor updates are a hassle as a founder (you are building the future & that's no easy feat!) but they can become weapons of mass construction if used right: 1) They push you to measure & prioritize what matters as a founder (focus is a weapon); 2) They help you build a story (at the end we are all selling a story of what the future looks like!); 3) They can help you allign & mobilize your investors into achieving your next goals. It's your fidiciary duty to update your investors & leverage their strenghts! Onwards!

Once you have raised capital, you must learn how to manage your investors. The role of Investor relations (IR) is to manage and maintain relationships with investors and take some of the pressure off the CEO. Although a company may not be fundraising, it should continue to forge new relationships and keep the existing ones warm. This approach requires a shift in mindset. In addition to reporting, prioritise listening over talking.

In 2023, social media platform Discord faced criticism for its lack of communication regarding a data breach, leading to investor concerns and user backlash. This highlights the importance of transparency and timely communication even during challenges. Historically, communication between startups and investors was often one-sided, with investors holding most of the information and power. However, with growing awareness of founder rights and increased competition for investment, transparent communication is becoming a key differentiator for attracting and retaining investors. Startups with frequent and transparent communication with investors experience higher valuation growth compared to those with limited communication.

Once the ink's dried and you've got investors on board, it's time to start nurturing that relationship. Keep the lines of communication wide open by chatting regularly and being upfront about everything. Set up a solid plan for how and when you'll touch base – whether it's through email, calls, video chats, or online platforms. Share the nitty-gritty details like financial reports, key performance indicators, updates on your product, what customers are saying, and any shifts in the market. Be real about your wins and losses, and don't hesitate to reach out for advice or support. And always show your gratitude for their input and support – it'll go a long way in keeping the partnership strong!

I disagree with the "meet or exceed your goals". This is not a theoretical exercise. In reality things change and we don't expect perfection but progress. A way to maintain a positive relationship does not ONLY include good news. That is counterproductive to a space of authenticity and humility to grow. We make mistakes, markets change, we adjust. Good communication is about trust, for the good and the bad, we are all in the same boat. Don't sugarcoat and do not ignore challenges. And definitely do tell us investors about them.

Doing the deal is only the first part of the journey. What's critical after the transaction is to create a relationship that is mutually beneficial and provides value to both parties. As such it is not just about communication and expressing gratitude, but actively working together and help each other at critical junctures.

As Alicia suggests below, do not bury the lede, especially if the most notable news is negative. My experience with high-wealth and institutional investors alike is that they all want regular reporting. Good or bad. And, although it is easy to do so going into a deal, do not ignore the reporting requirements negotiated with their investor. I know developing a reporting function does not seem very important next to the business model. But it is important to those who provide the money. For example, please do not agree to deliver reports in X days if you know you will likely need X+Y days to get them done. Being “a little late” is not okay in this business. It happens. But is not something that helps anyone score points with their investors.

While securing funding is often the primary focus, the subsequent journey of delivering on promises and fostering a sense of partnership is equally crucial. Investors are not merely financiers but strategic partners and allies in the success of a venture. Therefore, nurturing these relationships with care, respect, and commitment is essential. Respecting the time and resources of investors is fundamental in nurturing strong relationships. Every interaction should be conscientious of their time, with communication and meetings purposeful and efficiently conducted. Most importantly, deliver bad news first and promptly. The last thing a founder wants is for the investor to find out bad news from someone else.

Never select an investor based solely on funding. Investors are invaluable mentors who can accelerate your business. Acknowledge the relationships and expertise investors bring to the table by giving them a voice.

(a) Embrace a culture of continuous learning and improvement, soliciting feedback from investors and leveraging insights to refine strategies, processes, and performance. After each investor engagement or milestone, we solicited feedback through surveys, interviews, and feedback sessions, seeking insights into areas of improvement and opportunities for enhancement. By embracing a mindset of continuous improvement and actively incorporating investor feedback into our practices, we demonstrated our commitment to excellence and responsiveness (b) Offer value-added services and support to investors beyond financial returns, providing access to resources, expertise, and networks that enhance their overall experience and satisfaction.

Define a role for investor-relations. Report transparently and regularly. And it definitely helps if you can deliver a top-notch return-on-investment :)

The Board: of directors is a critical component of any company. They provide oversight, strategic guidance, and accountability. They are the custodians of the company's mission and values, ensuring that the organization stays true to its purpose. However, the board is not there to manage the day-to-day operations of the company. That is the role of the CEO. As the CEO, your role is to lead. Your job is to steer the company towards its goals, navigating the challenges of the business landscape. Your job is also to lead the board, but differently. Board members are experienced and seasoned professionals who deserve respect. However, a successful CEO is one who is assertive in communication and humble in seeking guidance.

Consistently keep an eye out for fundraising opportunities even during periods when you're not actively seeking investment. Explore alternative avenues for securing funds beyond traditional investment routes. Additionally, never underestimate the importance of conducting your own due diligence on potential investors to ensure alignment with your company's vision and values.

Legal Compliance: adherence to legal and regulatory requirements of all countries involved: intricate tax considerations, regulations on foreign investment, and international trade laws. Embrace cultural nuances. This level of sensitivity can be incredibly valuable in fostering and preserving a sense of harmony and mutual respect. Communication Styles: Customize (e.g., formal vs personal) communications to align with the preferences of your investors. Building a Global Network: Develop strong connections with investors from around the world. Embrace a global mindset: Emphasis on "Long-Term". This approach will enable you to effectively navigate the ever-changing landscape of global business dynamics.