“A negotiator should observe everything. You must be part Sherlock Holmes, part Sigmund Freud.” Victor Kiam
The first half of 2021 started in an accelerated way, a figure of more than 300 billion dollars was invested by VC funds in more than 15 thousand transactions in Startups. These operations had a previous negotiation between entrepreneurs and VC funds, which allowed them to reach an agreement.
In each of these processes there are multiple elements that both entrepreneurs and investors must consider to reach the successful completion of a negotiation, which ends with the investment of capital in the startup.
Some elements that we have identified that should be avoided when negotiating are:
1. Not studying, not understanding and not empathizing with the counterpart. Sometimes entrepreneurs or investors have a very big ego that prevents them from being open at the negotiation table. If there is a rapprochement with the other party, it is because both parties want to reach an agreement. When the counterpart is simply blocked, the only thing they are doing is burning current and future relationships that can be useful in the entrepreneurial ecosystem.
2. Not preparing for a negotiation. Investors usually know what the elements to negotiate are, since they have made multiple investments and make a living out of it. On the contrary, entrepreneurs, especially beginners, do not understand the process or the terms to be negotiated and make fundamental mistakes due to lack of preparation. Preparing for a negotiation will allow both parties to think of constructive and creative solutions for the benefit of all.
3. Leaving the negotiating table without being clear about the counterparty’s terms. Sometimes the counterparty is not entirely clear about the agreement they are seeking. So don’t just exchange emails, schedule a new call or face-to-face meeting with them and their lawyer, where you can resolve all your doubts and find a point of agreement.
4. Ignoring that the deal and its terms will have an effect on future capital raises. Successful startups will raise capital multiple times and future investors will use the agreements between the parties from previous negotiations or rounds as a starting point. Usually the Venture Capital world is built on a foundation that has already been established.
5. Decisions taken lightly and retractions have high costs. Negotiation is done in stages; in each stage you reach fundamental agreements such as valuation, decision making process, and on this you build for subsequent rounds. If you have already agreed on something, the most coherent thing to do is to keep your decision. Your word is your main asset and your reputation is at stake.
6. Selecting lawyers based on friendship. When you choose your advisors based on the relationship they have with you and not on their mastery of the subject matter or the added value they could bring to the negotiation process, you could find yourself surrounded by the wrong people to move your venture forward. For example, you may know a lawyer who is very good at corporate matters, however, he or she may be completely unfamiliar with the world of Venture Capital.
7. Demanding something that you are not willing to negotiate. Every negotiation is a quid-pro-quo, that is, something in exchange for something. Do not expect to win all the points, because, even if you do, the other party could be resentful and this could generate future friction. For example, if you offer a MFN, think well about the rights you are going to give or they will demand later, since you will have to give them to the counterparty you gave the MFN to.
“Let us never negotiate out of fear. But let us never fear to negotiate.” ~John F. Kennedy
8. Inefficient management of the process. A negotiation can take hours, days or months, and there are even times when the transaction may die due to lack of continuity in the negotiation process. Therefore, always manage the process efficiently, reviewing documents, sharing comments and negotiating with the counterparty in an expeditious manner.
9. Giving up. Always stay calm and don’t throw in the towel. Negotiations are a fundamental part of any business process. Never take the negotiation process personally and always exhaust all possibilities to reach a fair agreement.
10. Stop being objective and flexible. Always look for win-win positions and long-term commitments. When an investor invests in a startup, he does it thinking about the next five to ten years.
11. Overconfidence. Negotiations can be slower and more complicated than expected. Therefore, even if you trust your lawyers and the counterparty, maintain your position with arguments and not just for the sake of being right.
Sometimes both entrepreneurs and investors have expectations of finishing the negotiation process quickly in order to focus on day-to-day activities. However, remember that the negotiation process takes time. Don’t try to finish quickly, because you run the risk of reaching unsubstantiated agreements or agreements that may have a negative impact on the future consequences of your business. The negotiation process is similar to the process of piloting an aircraft: “The more hours you have spent in flight training, the more experience you will have during the actual negotiation process.
“The most difficult thing in any negotiation, almost, is making sure that you strip it of the emotion and deal with the facts.” ~ Howard Baker
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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