The Language of the Deal
Kim Polese, Moderator
Question: Memorable deals?
Wendy: Hail Mary funding time -- lean times but recognizing big opportunity ahead. Didn't close doors, survived.
Lauren: Has had many deals involving business risk. One client involved in a negotiation was a litigator on a related deal -- important lesson: knowing who is on the other side of the table and biases they bring, not just facts of the deal.
Carolyn: 3 founders -- took them from founding through funding to sale to Apple. When starting out lots of people not sure when to bring people in e.g. lawyers, etc...Can create documents online but don't know goals, ideas, future, etc.
Amy: Most interesting negotiation setting up my own company -- extremely personal! Better understand why deals are more emotional for founders than investors.
Kim: Early start up decided not to take a deal, focused on building product and finding customers - went back to investors and got a better long term deal.
Question: Experience with white label OEM integration or other types of partnerships?
Wendy: Several -- we pay a percentage of revenue as a license. OEM deals are easier with cloud technology to deliver services. No integration fees generally - conserves cash and pay on the backend.
Lauren: Partnership deals generally - data sharing and notification to end users. Have to work out who owns, who delivers and what is included in notification. Also, negotiating indemnities are an issue.
Carolyn: Set up termination clauses going in -- don't focus on possibility of failure. Have good lawyers to protect your interests.
Kim: Structure so both partners have skin in the game.
Wendy: Be clear with partners upfront and clarify goals, responsibilities, input... then take to lawyers. Deals are done with people first.
Carolyn: When looking for lawyers look for IP, tech backgrounds -- ask for referrals. Lots of lawyers out there and the right one for your needs.
Lauren: If your business deals with patents more important to have a patent attorney than business consultant. Other types of businesses it might be the opposite.
Kim: Fast changing spaces -- set regular milestones/check-ins to review and renegotiate if necessary
Question: How to structure payments and rev-share with partners?
Wendy: For us it was straightforward -- knew the value of partner's portion and what market value was. Took base price + margin to partner. Re-vet deal every year.
Carolyn: In addition to people, IP one of the most important assets of your company. Very important to protect. Have employees assign all developed IP to company so cannot take when they leave. E.G. 3 founders, no agreement, one founder leaves and remaining two had hard time negotiating funding later. Can be a single one page document with employment offer letter.
Amy: IP is very important to investors so take care of as founders before seeking investments.
Kim: Let's move on to finances. We have a template terms sheet.
Devil is in the details, e.g. people can get caught up in valuation and ignore dilution
Carolyn: This example is very wordy but can be simple and short. Term sheet is basically a summary of terms. Confidentiality and No Shop provisions can be built in.
Amy: This is a series A term sheet -- different from convertible note.
Typically start with a convertible note: easy to get done, not expensive from a legal side, can build with angel investors, smaller (usually $500,000). Don't have to value (i.e., my company is worth X). Series A then converts that stock to preferred stock at a discount.
Series A is usually larger, angels and VC invest, preferred stock, senior to the common stock. Stock is priced so valuation is required. Pre-money valuation (value before funds raised in that round), value usually negotiated with investors.
Question: How do you know when it's time to move from Angel investing to VC?
Amy: Less clear (super angels and VC doing seed investments). Consider when cash is needed but start prepping as soon as you close first round. Fund raising is continuous -- make sure investors always know when you are reaching milestones.
Wendy: Can break down milestones by team, technology, traction, solutions.
Kim: Markets and climates change so if money is available take it.
Question: What are key elements to look for before series A?
Kim: Built customers and then ready to build the team so needed funding to pay salaries of top notch people plus opportunity to partner with world class VC and their connections. Small Series A and moderate B because started to sell.
Wendy: Look at product itself and readiness. Remember with investors - they want to talk about potential but also minimize risk. As an entrepreneur you are looking to juggle. There are lots of ways to finance a business and sometimes it seems like in Silicon Valley other people's money is the only way but remember not always. Focus on bringing value to customers vs. exit. If you have a great idea you are passionate about there are lots of ways to finance. Think about the cost of cash. Think about time horizon. How big is the idea, how long will it take to execute and what is the talent needed to build it?
Amy: If you can get venture debt rather than equity then go for it because it is cheaper. For everyday bank debt it looks like those markets are coming back so time to start looking at those options again. Also crowd-funding sites - pre-sell your products and get money to build. Look into every possibility before fundraising and what is cheapest because equity most expensive.
Audience: Incubators/Accelerators can be helpful if you need small amounts of funding plus expertise. Equity varies - e.g. $18,000 - $25,000 investment for up to 10% of the company. Look at value of the services (e.g. would cost $200,000 to purchase). Opportunities to get in when all you have is an idea not a prototype so can be useful there.
Amy: Look a the Incubator's brand, connections, graduation/launch/funding rates of companies going through Incubator program beyond financial
Wendy: Differentiate beyond price - look at outcomes.
Lauren: From the perspective of someone brought in to work with incubator companies -- opportunity to get ideas about state of the market by looking at all the companies in a class. Can be a great opportunity to get more personal, direct hand-holding, mentorship & connections from smaller VC or individual investors vs. brand name big VC.
Audience: look for track records - many new accelerators popping up and some wont have the relationships. Buyer beware.
Audience: understand and have a sense of yourself and look for what skin investors/mentors/accelerators have in the game
Question: Memorable lessons from failures?
Carolyn: Company started a corporation online then started a new one and thought first one would just go away. First entity still exists. Have had companies come to Cooley that didn't properly set up from the start. Time consuming and expensive to untangle later on. If you are going to hire an employee review their existing employment contract for conflicts or what they can/cannot bring to working with you.
Wendy: Don't ignore funding opportunities because you want to get back to work - e.g. adding late investors to a round. I was naive about how easy it is to raise money. If I could roll back the clock I would do it differently. Know more about money and make that shit happen! It's other people's money.
Lauren: I started my own business and I didn't understand how much my time was worth. Know the market, talk to other people.
Amy: All dollars are not created equal -- have seen companies with two different term sheets with two different valuations and companies chose based on valuation not other benefits to the deal.