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14 - VC Negotiation

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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miku hrsh
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0% found this document useful (0 votes)
115 views

14 - VC Negotiation

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.

Uploaded by

miku hrsh
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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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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