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    14 - VC Negotiation

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    miku hrsh
    This document discusses venture capital (VC) negotiations between VCs and entrepreneurs. It notes that VCs aim to minimize risks and maximize returns, while entrepreneurs seek capital and control. Both sides can gain negotiating power from expertise, reputation, alternatives, and addressing the other's concerns. Key documents in a VC deal include non-disclosure agreements, letters of intent, purchase agreements, and shareholder agreements covering ownership, control, exit rights, and downside protections. Liquidation preferences determine how proceeds are distributed in an exit; common types are 1X preference and 1X participating preference.

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    14 - VC Negotiation

    Uploaded by

    miku hrsh
    68 views10 pages
    This document discusses venture capital (VC) negotiations between VCs and entrepreneurs. It notes that VCs aim to minimize risks and maximize returns, while entrepreneurs seek capital and control. Both sides can gain negotiating power from expertise, reputation, alternatives, and addressing the other's concerns. Key documents in a VC deal include non-disclosure agreements, letters of intent, purchase agreements, and shareholder agreements covering ownership, control, exit rights, and downside protections. Liquidation preferences determine how proceeds are distributed in an exit; common types are 1X preference and 1X participating preference.

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    This document discusses venture capital (VC) negotiations between VCs and entrepreneurs. It notes that VCs aim to minimize risks and maximize returns, while entrepreneurs seek capital and control. Both sides can gain negotiating power from expertise, reputation, alternatives, and addressing the other's concerns. Key documents in a VC deal include non-disclosure agreements, letters of intent, purchase agreements, and shareholder agreements covering ownership, control, exit rights, and downside protections. Liquidation preferences determine how proceeds are distributed in an exit; common types are 1X preference and 1X participating preference.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    68 views10 pages

    14 - VC Negotiation

    Uploaded by

    miku hrsh
    This document discusses venture capital (VC) negotiations between VCs and entrepreneurs. It notes that VCs aim to minimize risks and maximize returns, while entrepreneurs seek capital and control. Both sides can gain negotiating power from expertise, reputation, alternatives, and addressing the other's concerns. Key documents in a VC deal include non-disclosure agreements, letters of intent, purchase agreements, and shareholder agreements covering ownership, control, exit rights, and downside protections. Liquidation preferences determine how proceeds are distributed in an exit; common types are 1X preference and 1X participating preference.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 10

    Private Equity and

    Venture Capital
    Atul Kedia
    VC Negotiation (VC vs. Entrepreneur)
    Session 14

    Authorized for use only in Mr. Atul Kedia's PEVC course at IIM Indore from Oct 2020 to Jan 2021. 2
    VC Negotiation

    Authorized for use only in Mr. Atul Kedia's PEVC course at IIM Indore from Oct 2020 to Jan 2021. 3
    VC vs Entrepreneur - Interests
    VC Entrepreneur
    Solve sorting problem (select the best entrepreneurial
    Get outside capital since internal capital is not enough
    venture)

    Minimize agency costs / problems Maximize financial gains from equity stake

    Retain control, minimize constraints on behavior and


    Maximize financial returns
    decision making

    Maintain option to abandon Build reputation

    Be able to force entrepreneur to exit and distribute


    Get outside expertise and contacts
    proceeds

    Maintain reputation

    Authorized for use only in Mr. Atul Kedia's PEVC course at IIM Indore from Oct 2020 to Jan 2021. 4
    Entrepreneur – sources of negotiating power
    Deep expertise in hot specialty
    Great track record
    Solid team
    Can keep VC from investing in later rounds/funds
    VC wants to lay groundwork for productive working relationship
    VC’s reputational concerns; will need entrepreneur as reference
    BATNAs: Other VCs, angels, banks, corporations

    Authorized for use only in Mr. Atul Kedia's PEVC course at IIM Indore from Oct 2020 to Jan 2021. 5
    VC – sources of negotiating power
    Providing capital
    Adding credibility to entrepreneur
    Actions send signal to other potential VCs
    Adding value through expertise and contacts
    Entrepreneur’s reputational concerns
    Imbalance between supply and demand
    BATNAs: Providing capital/time to other start-ups or existing portfolio companies, spending time
    fund raising

    Authorized for use only in Mr. Atul Kedia's PEVC course at IIM Indore from Oct 2020 to Jan 2021. 6
    How to Protect Interests?

    Reduce information Align


    asymmetries incentives

    Avoid Conflict

    Protect financial
    Manage decision making
    downsides

    Authorized for use only in Mr. Atul Kedia's PEVC course at IIM Indore from Oct 2020 to Jan 2021. 7
    Transaction Documents
    PE/VC fund enters into a range of contractual agreements with the target company and its owners that
    define everyone’s rights and obligations at specific points in an investment process
    Typical transaction documents:
    Non-Disclosure Agreement (NDA)
    The Letter of Intent (LOI) / Term Sheet (TS)
    Sale and Purchase Agreement (SPA)
    Signing versus Closing
    Purchase and sale clause
    Representations and warranties
    Covenants – affirmative vs. negative
    Indemnification
    Conditions precedent (CPs)
    Material adverse change (MAC)

    Authorized for use only in Mr. Atul Kedia's PEVC course at IIM Indore from Oct 2020 to Jan 2021. 8
    Shareholder Agreement (SHA)

    Economic Provisions Control Provisions

    Shareholding Structure Board of Directors

    Liquidation Preference Board Deadlock

    Dividend Preference Share Transfer Restrictions

    Good Leaver/Bad Leaver Drag-along/Tag-along Provisions

    Authorized for use only in Mr. Atul Kedia's PEVC course at IIM Indore from Oct 2020 to Jan 2021. 9
    Liquidation preference
    A BA group invests $1 million for 25% of a venture without a liquidation
    preference. Next month, the venture is sold for $2 million. How much
    would BA group receive?
    What if the BA group had negotiated a 1X preference in this deal?
    What if the BA group had negotiated a 1X participating preference in this
    deal?

    Authorized for use only in Mr. Atul Kedia's PEVC course at IIM Indore from Oct 2020 to Jan 2021. 10

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