After several years in the VC landscape, many of us at Team Breega would describe the early-stage startup/VC discussion and negotiation phases as being a bit like a dance. One that requires a lot of focus, some seduction, the energy of a Duracell Bunny and an excellent sense of timing.

So let’s step onto the dance floor shall we?

Having successfully launched your startup you’ve decided that it’s time to reach out to investors to fund the next stage of your company’s’ growth. Armed with a great deck, a sound business plan and promising metrics, you’ve managed to establish contact with the VCs (let’s call them your dance partners) that you feel would be the right fit for your company. Your pitching sessions are going well and the VCs seem very interested in both your business plan and your exec team. In fact, it looks like they might be willing to become long-term dance partners.

If you and your early-stage startup team have already reached the point where you are pitching (or dancing) with several potential investors at the same time then you can give yourselves a well-deserved pat on the back.
However, now is not the time to let the pressure drop and, remember, just like when you’re dancing, momentum and timing are key!

The main idea here is to get all of the VCs to arrive at the point where they offer you a Term Sheet at the same time. So in order to keep doing the dance that should hopefully lead you to the negotiating phase, here are some important points to keep in mind…

Doing the dance? Make sure your feet are comfortable and your shoes shiny!

This basically means: be sure that your company isn’t running out of cash when you’re entering into discussions. You want to be in as strong a position as possible when you start to negotiate. This won’t be the case if your main worry is banking that VC cheque as quickly as possible. Start raising whilst you still have enough cash to run your business. Your outfit should be perfectly pressed and your shoes shiny before you consider asking anyone to dance!

Master the timing of your steps and keep them quick and neat

Most VCs have a real fear of missing out on the big opportunity and being left out of the dance. Letting them know that there is competition out there will keep them engaged and on a tight schedule. Avoid losing momentum by letting them know discussions are going well with other VCs and politely suggest deadlines for them to make a decision. Create urgency and desire.

Throw in some fancy moves but make sure your style remains authentic

It can be tempting to “improve” reality or exaggerate your company’s performance but, if you enter into a partnership your VC will eventually know all there is to know. Untrustworthy behavior can destroy a deal. You don’t want to fail a Due Diligence phase because you weren’t entirely truthful in your initial discussions. You also don’t want your investor to lose interest after a few Board meetings because you misled them or weren’t totally straight about the facts. A founder who is open with their VC about what is and isn’t will be far more likely to build a successful partnership. You want to demonstrate you know the challenges you are facing and your next steps are planned accordingly.

Don’t be afraid to admit it if your moves aren’t always perfect

During discussions on your company, you should always be prepared to recognize where your weaknesses lie, what could have been done better in the past and what improvements need to be carried out on your product or organization in the future. A VC will be far more engaged with a CEO who seems to understand exactly where he/she stands as opposed to someone in denial or unable to see the obstacles that will eventually trip them up.

Check out the other dancers on the floor

Seek to talk to the companies in the VC’s portfolio that are outperforming expectations, but also try to get in touch with those who are not doing so well or whose relationship with the VC is not as good as hoped. Find out how the VC works with the companies and what they offer in both good and bad times, what was negotiable, why they made the choices they did, and what terms were the most consequential in the months and years following the deal.

Once the first half of the dance has ended and your startup has been well and truly put through its paces, if the VC is considering becoming a long term partner, then they will offer you a Term Sheet. And this is where the negotiations begin and the steps become trickier.

The waltz that you’ve been doing over and over throughout the past few weeks is about to become the most energetic of dances that will require all of your energy and focus so now is not the time to let your feet falter or the rhythm drop.

Let’s take it to the Term Sheet!

The Term Sheet outlines the terms by which an investor will make a financial investment in your company. Although not legally binding, it does set the tone for the legal agreements that will follow. Negotiating a Term Sheet is an important step. Each party will look to protect their own interests in the event that it all goes horribly wrong and the dance turns into a scary stampede.

Discussions can, therefore, get heated and it can become a fraught and drawn-out process. On the upside, the talks that follow will also provide you with some real insights on the VC that will help you to figure out whether or not they really are the right long-term partner for you and your company.

The term sheet is of a different tempo and requires some very different moves to the ones you’ve been doing up until now. So here are some key points to keep top of mind when carrying out this particular dance.

Understand the terms before getting on the dance floor

Term Sheets can be complicated, and you may need help understanding what the various provisions imply. A good lawyer with experience in VC terms can help you with this. You should also ask the VC to explain the points that you don’t fully understand and the philosophy behind it all, and what happens if the scenario goes bad. This will help you create a feeling of collaboration rather than conflict. For more help and advice on understanding Term Sheets, we recommend downloading the Galion Project Term Sheet for series A rounds (French) written in collaboration with Breega and other French VCs.

Find a qualified teacher to guide you through the steps but don’t forget you’re leading

You may want to try to negotiate terms by yourself but unless you’ve had been down this road many times before, you will need professional support. You should therefore hire a lawyer with experience in VC financing. If you already have a lawyer, but they are not experienced in VC financing, get recommendations for a new lawyer who is. It will save you both time and money. The lawyer should provide you with professional support and input during the drafting process but their job is not to replace you during negotiations. It is up to you to lead the talks and show that you are capable of having frank and open discussions — no matter how difficult the topic — as you are the one entering into the relationship with the VC.

Focus on your performance and not on the judging.

During Term Sheet discussions founders often put a lot of focus on valuation. But it’s good to remember that this is not a one-off negotiation, it’s about agreeing to terms that will establish and define the relationship. When deciding whether or not to accept a job offer, for instance, you will likely take several different factors into consideration before making your decision, compensation will just be one of them. VC negotiations are the same. Valuation often gets disproportionate focus, but in reality, the figures don’t usually carry that much weight in the long run. A higher valuation may even lead way to a down-round if you don’t end up delivering on the expected multiple — remember, it’s a growth industry, and it’s always easier to grow from a lower rather than a higher valuation.

Understand that you will always have a leading role.

Founders tend to focus a lot on clauses such as Bad Leaver or Forced Exit and spend a lot of time negotiating them when in reality they are more indications of what could, rather than what will happen. For example, as regards Forced Exit clauses, it’s worth keeping in mind that in real life no M&A deal can actually happen without the founder agreeing to it so don’t spend too much time worrying about it. Define your goals in advance and be clear on what it is you really want and need from your VC, these are the points to negotiate with care. Choose your battles by being flexible on the points that are less important to you.

Don’t be afraid of letting go! (just a little bit, not too much though!)

Founders start off owning 100% of their company and this amount decreases every time they raise capital. It’s important to negotiate the best dilution terms with VCs and to calculate and understand how much you could be diluted in future rounds. For a seed round, VCs will normally expect to take around 25% of your capital. Be wary of those that ask for much more as this could affect your ability to raise future rounds and therefore to grow.
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The role that you play during the early-stage startup/ VC dance, when and how you lead, the way in which you negotiate the different steps – especially the tricky ones- will ultimately tell a VC a lot about your character and potential as a business leader. Make sure you show them that you are capable of not only dancing beautifully but also of looking after your company’s and your own interests with integrity, openness and strength. Show them that they made the right decision when they decided to become your long-term dancing partner.

Good luck with the dance and stay tuned for more top startup tips!