How To Negotiate With VC

by Deepak Malhotra

A VC: 

There was a lot of interest in this company, and the founders had a fair amount of leverage. They used every ounce of it to extract a higher valuation,

he said.

We kept saying that our firm would bring a lot more to the table than money, and that the mentoring, strategic advice, network resources, and political capital we could offer were almost unmatched. The founders set all that aside and made it about the money. It left a bad taste in our mouth. The deal was still worth doing—barely. But we have less of an equity stake in the company than we would ordinarily want, and given all the other portfolio companies that need my attention, I don’t feel any obligation or desire to give these guys additional assistance.

In retrospect, the entrepreneurs at the start-up made a costly mistake: Either they undervalued the nonmonetary resources the VC firm had to offer, or they assumed that mentoring and strategic support would inevitably be available. In either case, they negotiated a deal that looked great on day one but proved to be perilously misguided in hindsight. More of this