In this series we set out to present models and ideas learned over the years at the cost of quite a bit of matriculation and some teeth.

Let’s take Finance, particularly negotiating for funding.

Sitting down with an investment banker is hardly the time to fumble with complicated notes and financial textbooks. When I walk in to a negotiation, here is a list of the elements of the deal for which I must have clear positions and fallbacks. Likewise, I will have worked through the other side’s scenarios, as well as their likely waterboarding arguments ( e.g., “It’s only sweat equity’s all you got….”).

As the positions shift and preferences ebb and rise during negotiations, there’ll be fancy acronyms and instruments, and it will be key to hang on to eight fundamental pillars. An old mentor also once said not to forget to throw in some sleeves on the vest – in the areas you can afford to be negotiable. I’ll assume you’ve read up on the basics, and the comments below will tend to be to the counterintuitive.

1. Principal: likely, for the entrepreneur, a number to keep firm. In fact, ask for twice what you think you’ll need; the venture capitalist will guess that the optimistic nature of an entrepreneur tends to underestimate the need, and the amount is always bigger from your starving perspective than it is to the big financier. Furthermore, the banker is in for a penny, and in for a pound: he’ll rather that you are adequately funded than be nickel and dimed to distraction.
2. Interest: See if you can massage this to match your schedule of returns: you’ll likely give a higher return for a longer-deferred interest service. On the other hand, do you have someone on the team wearing the financial hat ( role play!), who’ll temper your temptation to quickly agree to a future higher rate, as starved as you might be for cash relief?
3. Term: Again, VC’s will tend to think that an entrepreneur always underestimates how much and how long it takes. Set yourself up for stellar performance: give yourself twice the time you’ll think it will take to get to safe haven.
4. Risk: One of the first things they’ll slap you with to soften you up. Be proactive: identify the likely risks, and how you might mitigate them. But this is an area of ranging opinions; use third-party sources to support your opinion. Some more subtle aspects of this would be in. e.g., preferred instruments having prior claims to returns.
5. Security: Hopefully, your capitalist is more enlightened than to narrowly look for brick and mortar collateral ( and even that is suspect in current markets). The more technology-based your product, the more you’ll have to persuade on abstract or intangible economic value. Patents are nice on the corporate cv, but no guaranty of value; still, it is a better offering than one’s firstborn.
6. Liquidity: We’re talking about the instrument you are offering, as well as the underlying collateral to secure the instrument.
7. Control: They’ll likely be more reluctant than the current  Federal administration to get involved directly in your operations, but this might involve aspects such as managerial and board composition, and even the controlling shares of a narrow group.
8. Ownership: Tightly entwined with Control, but a separate consideration. For example, the issue of voting and non-voting share classes.

I have found it easier to remember these in this sequence, but you may want to mix it up to make up your own mnemonic.  And be careful out there.

If you enjoyed this post, make sure you subscribe to my RSS feed!

This entry was posted Friday, November 20th, 2009 at 3:39 pm and is filed under Simply Handy. You can leave a response, or trackback from your own site.