galatime.com - Kaushik Gala

Note: The views & opinions expressed in these essays are strictly my own, and not those of any entity I may be associated with as an employee, consultant, promoter, investor, etc.

ARCHIVES

 

Pune

Technology Venture Investors in Pune

 

Technology Entrepreneurship in India - Teams

Entrepreneurial traits

Picking cofounders

 

Technology Entrepreneurship in India - Generating Revenue

Is your business model well-defined?

Your industry's value chain

What is your value proposition?

Which distribution channels will you use?

Who will drive business development?

 

Technology Entrepreneurship in India - Raising Capital

Venture capital & venture capitalists (VCs)

Corporate venture capital

Angels & angel networks in India

Government support for Indian startups

Proof-of-concept funding

Do you need a business plan?

How much money should you raise?

Startup valuation

Pitching to investors

Figure out the term sheet

Negotiating with investors

Due diligence - A necessary evil

Time to sign the investment agreements

 

Equities, ETFs, F&O

› Oct 2011: Equity Risk Premium for India

› Jun 2011: Investing in Indian equities

 

Technology Enterprises in India

› Nov 2010: Technology investment in India - WATER

› Aug 2010: Technology enterprises in India - 3 avatars

 

Risk Capital for MSMEs

› Mar 2010: Risk mitigation for investors in MSMEs

› Mar 2010: Why don't (Indian) MSMEs get risk capital?

› Feb 2010: Angel investing - Will it work for Indian MSMEs?

› Feb 2010: What's so special about innovative MSMEs?

› Feb 2010: Where do Indian/NRI (V)HNIs invest?

› Feb 2010: Funding options for innovative MSMEs in India

› Jan 2010: Innovative MSMEs in India

Negotiating with investors

(Last revised Mar-2012, Send comments to galatime@gmail.com)

Most technology entrepreneurs assume that their leverage against investors is poor. After all, they are one of hundreds of companies that the VC is looking at - the VC might walk away if the entrepreneur starts negotiating.

This is true initially, but once you get past a term sheet, you can assume that the investors need to give you money as badly as you need to take it. This is especially so in India, where high-quality deal flow remains thin, and once investors get serious, they are unlikely to let the deal fall through.

Negotiating with investors is about making trade-offs; the key is to make the right ones:

  • Choose entrepreneur friendly (albeit less known) investors over unfriendly (but high-profile) ones
  • Choose simpler terms at lower valuation over complex terms at (not much) higher valuation
  • Choose investors who focus on your industry/market over those with large AUM and a vast portfolio
  • Try to retain board control, even if you have to give up a bit more equity, or accept stricter founder vesting schedules
  • Choose milestone-based investments at higher step-up valuations, over one-time (upfront) investments at lower valuations
  • Have a 'negative list' - terms that you are not willing to accept under any condition (e.g. participating liquidation preference, full ratchet, ESOP provision > 10%, ...)

With agreements running into 50 pages or more, it is tempting to negotiate and finalize one clause at a time. In general, this is a bad idea, since you could lose sight of the big-picture tradeoffs you are making.?? Instead, it is best to negotiate entire versions - and eventually have some long sessions with all parties to close the deal.

Perspectives