I’ve noticed two schools of thought in negotiating startup investment deals.
The first, which comes much more naturally to me, is to agree to a deal face-to-face and all the major points and then to follow up with a legal process where there should be ‘no surprises’. At BGV we go even further and are deliberately very open about our terms so that teams can decide even before they meet us whether we’re right for them. The best tech investors I’ve come across work this way and spend their time concentrating on how best to help startups rather than how best to structure the deal.
The second way that it seems to happen is much more tactical and, in some cases, adversarial. If I was to be harsh I would say it was characterised by investors ‘trying it on’. When the email comes through with the terms there are some ‘extras’ or it turns out that they’d like special terms over other investors they hadn’t mentioned before. It then goes round and round for a while, distracting the team from making progress and making founders wonder whether they’re going to have to argue everything this way in the future.
You can probably tell that I’m not a fan of the second process. As far as I’m concerned, if you find yourself negotiating tactically, you’ve both lost. Unless a startup and its investors are on the same side from day one your chances of success go down rapidly.
Despite the good growth in the London startup scene, it still hasn’t reached critical mass and if as a startup you want to do a deal you probably won’t have a huge number of options. In the long run though I think it’s better for the startup world if investors err on the side of generosity. Of course there are limits — crazy valuations can be just as damaging as dodgy terms and institutional investors have a duty to protect their limited partners’ cash. But there’s no doubt that the power balance is shifting towards founders and personally I think that’s a very good thing.