How to negotiate with VCs

When negotiating with venture capitalists, most startup founders worry about only 1 thing - the valuation! However, as this HBR piece demonstrates, not focusing on other terms might lead to undesirable outcomes for founders more often than not. For example, liquidation preference, which is designed to protect a VC's up-front investment, tends to have a big impact on how much wealth is transferred to the VC if the company enjoys moderate success but has much less impact if the company performs spectacularly. If you think about these issues carefully during a negotiation, you will discover that a VC's preferences about such terms can reveal his interests and his assessment of a company's prospects. A VC who insists on enhancing the liquidation preference may believe that the valuation proposed by the founders is too high. The liquidation preference serves as an insurance policy that protects the VC's downside risk from founder overconfidence. More in this article