A Case Study on Term Sheets
Jay Jung shares a case study on negotiating venture capital term sheets that helped their client increase their valuation by 80% and double the capital raise.
Most founders are not deal makers. In contrast, most investors are highly experienced deal makers.
One of our Client Companies received a term sheet from a well-known VC in the industry. The VC was the client’s top pick as a potential investor. The Company was very excited; receiving investment from such a prominent firm would provide strong validation in the industry. However, the valuation was significantly lower than what they were expecting.
The client only had one term sheet from this specific investor and was in dire need of a cash infusion to maintain its fast growth trajectory. Discussions with other investors were lagging, with an unclear prospect of materializing into serious interests.
This is a weak hand. In traditional negotiation terminology – what is your BATNA (Best Alternative To a Negotiated Agreement)? The Company’s was perhaps none existent, at best weak. But as Adam Grant, the renowned Wharton professor, advocates, “The science of the deal reveals that great negotiators refuse to believe in a win-lose world. They care about both results and relationships. They don’t declare victory until all parties win.”
If valuation becomes the sole focus it is difficult to gain leverage in this situation. The Company effectively refuted the VC’s valuation approach and explained why it was too low and unreasonable. The VC did not push back on the Company’s logic, but their lack of push back did not mean they accepted the Company’s higher valuation.
The key to gaining something in this type of discussion is identifying other issues that matter to the investor. For investors, it is very rarely just about valuation.
How does one identify these issues? Astute observations are required about what the investor says and what they do. Asking the right questions can reveal hidden information. It would be so much easier if everyone were open and transparent but that is seldom the case.
Through multiple calls, emails and in-person discussions with the investors, using thoughtfully prepared scripts, talking points and Q&A, the Company was able to glean insight into the investor’s needs and pain-points. Ultimately, the investment dollar amount was an important factor for this particular investor.
Key points include:
- Low valuation
- Fund raising
- The valuation bid-ask spread
Access the full case study, Successfully Negotiating VC Term Sheets, on EmbarcAdvisors.com.