Want to keep control of your startup while securing funding? Negotiating with venture capitalists (VCs) is about more than just money. It's about protecting your vision, ownership, and decision-making power. Here's how to get the best deal:
- Understand VC Goals: VCs want big returns with minimal risk. Show them your growth potential, trustworthy leadership, and market edge.
- Focus on Key Terms: Negotiate valuation, board control, and exit terms carefully. Ensure you retain ownership and decision-making power.
- Prepare and Build Leverage: Research your investors, have multiple options, and back your numbers with solid data.
- Avoid Common Mistakes: Don’t fixate on valuation alone, ignore legal details, or be too rigid during talks.
- Build Relationships: Work with investors who align with your goals and can offer more than just money.
Pro Tip: The best deals happen when both sides feel like partners. Be clear, flexible, and focus on long-term success.
Now, let’s dive into the details.
Related video from YouTube
What Venture Capitalists Want
VCs aren't just writing checks - they're looking for opportunities that offer big returns while keeping risks in check. To get better deal terms, founders need to know what makes VCs tick and how to match their company's goals with what investors want.
Aligning Goals With Investors
The key to a strong partnership? It starts with doing your homework and building real connections. Here's what matters:
Know Your VC's Sweet Spot: Every VC firm has specific things they look for - whether it's certain industries or companies at particular growth stages. Before you pitch, make sure you fit what they want.
Tell Your Story Right: VCs need to see where you're headed and how their money will help you get there. As Reid Hoffman, co-founder of LinkedIn, puts it:
"Investors don't just buy into your product; they buy into your story."
Show You're Trustworthy: VCs want partners they can count on for the long haul. Take DocuSign's approach - they were upfront about their early tech problems, which led to stronger investor relationships and better terms later on.
Get the Terms Right: Focus on deals that work for everyone while protecting what makes your company special.
Key Factors VCs Consider
When VCs look at startups, here's what catches their eye:
Big Market Opportunity: Look at Airbnb - they showed Sequoia Capital the massive $1.9 trillion travel market potential, and that bet paid off big time.
Strong Team: Your team matters more than your product. VCs want to see people who've done it before or bring something special to the table.
Room to Grow: Companies that can grow fast without needing tons more cash get VCs excited. Think Slack - their subscription model showed how to scale up smoothly.
Edge Over Others: Tesla got investors on board by showing how their tech put them ahead in the EV race.
Numbers That Add Up: Clear financial plans matter. Zoom caught Sequoia Capital's attention in 2015 with solid numbers showing their path to making money.
The VC negotiation is a process in which people are deciding whom they want to associate with for years to come. If the VC is vulnerable, use the opportunity to build trust rather than to take advantage .
Important Terms to Negotiate
When negotiating with venture capitalists, founders must focus on terms that will shape their startup's future. These terms affect who controls the company, who owns what, and how successful the company can be in the long run. Here's what you need to know about the key negotiation areas.
Valuation and Ownership
The valuation you agree on affects how much of your company you'll give up and sets the tone for future funding rounds. Getting it right means keeping enough ownership while still making the deal attractive to investors.
Do your homework first: Look at what similar startups in your space are worth. Back up your numbers with solid data about your growth and costs. Take Canva and Figma, for example - Canva hit its $1 billion mark by showing off its fast-growing user base and money-making potential, while Figma pointed to its 3x revenue jump to land a $2 billion valuation.
Watch your equity: Don't give away too much too soon. Smart founders plan ahead for multiple funding rounds to keep enough control of their company.
Control and Decision-Making
The power to make big decisions is crucial for founders, but VCs want their say too. The trick is finding middle ground where founders can lead while investors feel their investment is protected.
Getting the board right is key. Look at what Katrina Lake did with Stitch Fix - she made sure founders kept the upper hand on the board even after big funding rounds.
Know your voting power. Be clear about who gets to decide what, especially for big moves like raising more money or selling the company. Push for rules that stop investors from taking over on the really important stuff.
Some founders, like those at Notion, play it smart by giving investors "observer" seats on the board. This lets investors stay in the loop without giving them voting power - they get to watch and advise, but not call the shots.
Exit Terms and Liquidation Preferences
These terms spell out who gets what when the company sells or goes public. Here's what matters:
Get clear on preferences: Most VCs want a "1x preference" - they get their money back first when the company sells. Watch out for "participating preferred" deals - they let investors double-dip, getting their money back AND a cut of what's left, which means less for you.
Talk about the end game: Make sure you and your VCs want the same kind of exit. WhatsApp's founders showed how it's done - when Facebook bought them for $19 billion in 2014, Jan Koum and Brian Acton made sure the deal protected their team and kept their product vision intact.
sbb-itb-8981daa
Negotiation Strategies for Founders
Want to get better terms from VCs? It's not just about what happens at the negotiating table - it's about smart prep work and building the right relationships before you even start talking numbers.
Do Your Homework
Know who you're dealing with. Research your potential investors and get familiar with what's normal in today's market. Match your pitch to what each VC likes to invest in, and back up your numbers with solid data. For example, if you're going for Series A funding in the U.S., keep in mind that the median pre-money valuation in 2023 was $30 million .
Make your financial projections crystal clear and tie them to specific goals you'll hit along the way. Here's a pro tip: if keeping control of your board matters more to you than a sky-high valuation (and it often should), make that your priority from day one.
Create Leverage With Options
Want VCs to take you seriously? Show them you've got options. Nothing makes investors move faster than knowing they might miss out on a good deal.
Here's what smart founders do:
- Get multiple investors interested at once - more term sheets mean more bargaining power
- Stay flexible about deal structure - maybe a convertible note works better than straight equity for some investors
- Keep your options open on raising amounts - being able to scale up or down can attract different types of investors
Build Strong Relationships
Here's something most founders miss: negotiations aren't just about getting the best numbers - they're about finding partners who'll help you build something big.
Take Canva's $60 million raise in 2018. CEO Melanie Perkins didn't just take Sequoia's money - she picked them because they could help build Canva's global team. That's thinking beyond the term sheet.
Make it work for everyone:
- Show investors how working together creates wins on both sides
- Be open to creative deal structures (like mixing equity and convertible notes)
- Consider offering board observer seats instead of voting rights - it gives VCs insight without giving up control
Remember: The best deals happen when both sides feel good about working together. Focus on building trust, be straight with your numbers, and think long-term about the partnership.
Mistakes to Avoid During Negotiations
Let's look at three mistakes that can sink your startup's funding negotiations - and how to dodge them.
Focusing Only on Valuation
That big valuation number might look impressive, but chasing it can backfire. When you fixate on valuation, you might give up things that matter more, like control of your company or end up with tough liquidation terms that hurt you later.
Take WeWork's story as a warning. In 2019, they chased a massive $47 billion valuation. But that chase led to messy governance, with founder Adam Neumann keeping too much control. When people started looking closely at their numbers, everything fell apart - their IPO flopped and their value crashed to $8 billion .
High valuations can also make your next funding round harder. You might face a down round (ouch!) or find investors getting nervous about your numbers.
Focus on what's important, negotiate and resolve the important points early, get the deal closed as quickly as possible and get back to growing the company
Overlooking Non-Financial Terms
The devil's in the details - especially those "boring" legal terms. Things like governance rights, exit terms, and investor protections can make or break your startup's future. Miss the fine print on registration rights? You might struggle to go public later. Skip over co-sale rights? You could get stuck in a bad exit deal.
Look at WhatsApp - they got it right. Their founders made sure they'd keep running things their way, even after Facebook bought them.
Don't sweat the small stuff. Make sure you have a good corporate start-up lawyer. Most of the terms just don't matter. Focus on what matters (price, ownership, and sometimes, control)
Being Too Rigid
Playing hardball can kill your deal. Here's a real example: In 2020, an AI startup lost a big funding opportunity because they wouldn't budge on who sat on their board. The investors walked, and the startup struggled to find other funding options.
Deal-making is about give and take. There are lots of ways to structure a deal that works for everyone - convertible notes, SAFE agreements, revenue-based financing, or funding tied to milestones.
As Pitch Deck Creators puts it: getting funded is more like running a marathon than a sprint. You need to stay nimble and keep your cool through the whole process.
Conclusion: Steps to Negotiate Better Deals
Let's break down how to nail your VC negotiations and get the best possible deal for your startup.
Think of VC negotiations like a chess game - you need to know your position, plan your moves, and think several steps ahead. Here's what you need to focus on:
Know Your Power Position Your negotiating muscle comes from things like having multiple investors interested in your startup, strong growth numbers, or being in a hot market sector. The more cards you hold, the better your position at the table.
Get Crystal Clear on Your Must-Haves Pick your battles wisely. Figure out what's non-negotiable for you - maybe it's keeping control of your company or hitting a specific valuation target. Take Instagram's founders, for example. When Facebook bought them in 2012, they made sure to keep creative control, which let them continue steering the platform's direction after the deal .
Zero In on What Really Matters Sure, valuation is important, but don't get hung up on just the numbers. Pay close attention to things like:
- Who sits on your board
- What happens if things go south (liquidation preferences)
- Who gets to make the big decisions (control rights)
Build Real Relationships Be straight-up with investors. Show them you're honest and ready to work together. Nobody likes surprises during negotiations.
Keep an Open Mind Sometimes you need to give a little to get what you really want. The best deals often come from thinking outside the box and finding win-win solutions.
Get the Right Help Bring in startup-savvy lawyers or advisors. They'll help you move faster and spot potential problems before they become real headaches. Here's what one founder learned the hard way:
Focus on what's important, negotiate and resolve the important points early, get the deal closed as quickly as possible and get back to growing the company
Keep Everyone on the Same Page Make sure everyone understands exactly what they're agreeing to. Skip the fancy legal jargon and spell things out in plain English.
