negotiation process
We are not going to attempt to provide you with a comprehensive guide to negotiation here. What we will do is provide you with some high level points about the typical process of a fundraising legal negotiation. Fundraising negotiations typically happen relatively quickly if the potential investor is interested in the deal and the company is actually ready and willing to make a deal. Prioritize your key issues first, plan to make trade-offs, leave some less important items that can be negotiated away, anchor high, find a zone of profitable agreement, and understand your walkaway points.
Typical Process
The typical fundraising negotiation process focuses on a term sheet. The term sheet lays out the proposed terms of the investment. After a company has received a term sheet from a potential investor, the managers, previous investors, and board members will often discuss the proposed term sheet and push back on any items they want to change. This process typically takes 1-2 weeks but it can be as fast as 1 day and as long as several months. Once parties have agreed to terms in principal, they sign the term sheet. A signed term sheet is not binding, so keep this in mind. Many entrepreneurs think that they have an agreement for funding once they have a signed term sheet. In fact, they generally have given up the opportunity to talk to other potential investors for a period of time while the investor has secured a 1 month+ period of time to engage in deep due diligence on the company.
Upon successful completion of the due diligence, and sometimes concurrent with due diligence, an investor will typically move into the "final documents" phase. This final documents (often simply referred to as the "docs") phase of negotiation is where the legal teams of both parties begin hammering out the final legal documents. At this point, most negotiation points become somewhat smaller and more technical although it is not uncommon for a few larger points to leak through to this phase.
After completion of the documents, the legal parties of both sides will establish a final date for signing and funding (wiring money). Typically documents are signed first and money is wired shortly thereafter. Sometimes, money is put into an escrow account until the documents are signed and then it is wired. Once the money hits the account, the deal process is complete.
Key Points
As stated by Brad Feld in a recent article, equity fundraising negotiations typically focus on two primary levers:
- Valuation--how much the company is worth, thus implied dilution for founders and prior investors
- Control--how much control the new investors receive and / or how control is shared among all of the parties
Debt negotiations are simiar but tend to focus on:
- Amount and availability of capital--how much money the company has access to and upon what terms
- Control--how much control the lender has over the company
- Recourse--what kinds of recourse actions the lender can take if the company fails to meet certain criteria or repay the loan