There is an investor interested in your start up! Yay – you can celebrate. No! you can’t. The difficult work of closing the investment has just begun.
On the basis of my more than 15-years’ experience, I humbly suggest as follows:
- Red-lines. The Founder or founder group needs to determine its redlines; not in the form of percentages and legal provisions, but as present and future priorities and red lines. Some of the questions you need to ask are:
- Is control a priority? Or future profit? A majority percentage does not necessarily mean control, or a majority share of the profits, or decision-making authority or anything else. You can retain certain control, even while giving up a majority holding.
- How much personal risk are you prepared to take? Some? None?
- Are you in it primarily for the money or because you wish to see the product developed!
Once you understand what is important to you – then and only then can you begin seriously negotiating the documents to close the investment.
A sharp hi-tech attorney with experience in representing founders can guide you in this process.
- Understand. Investing in a start-up takes place in a particular troposphere, on its particular terrain, with its own rules and customs. You need a teacher, a coach who understands the environment and the terrain and how to navigate and this particular territory.
Amongst others you will need to learn about:
- Cap tables, and Anti-dilution rights;
- Preferred Shares, ROFR, ROFO, tag-along, drag-along, preemptive rights;
- Veto rights, quorum, and much, much more.
An experienced investor and/or founder could probably explain the in-s and out-s of cap-tables and veto rights, but you would be better off with an experienced hi-tech attorney to “translate” these new concepts to you.
- Negotiate. And simultaneously with the foregoing, you better not slow down the negotiation with the investor.
You need to be forthcoming withall requires information, but make sure that the information is provided in the correct context. There may be things you are reluctant to disclose, but if disclosed at the right time and correctly framed it will be an advantage.You need to understand how to avoid potholes and what subjects are better not to bring up. There have been many books written about negotiating – but nothing can beat good people skills (or what they call emotional intelligence) and experience.
The skills one requires in negotiating are very similar to those used in mediating – after all, here also you are trying to get everyone to say yes.
Using an experienced hi-tech lawyer that is also a qualified mediator brings to the table invaluable advantages in negotiation.
Sometimes you can do everything right and still the transaction doesn’t close. Its not your fault – and the failure of the investment probably has nothing to do with you. However, if you are following the advice above and R U N (Red lines, Understand and Negotiate) you will significantly increase your chance of closing the investment.