Negotiation Leverage in Fundraising
Competition is power: the number of interested VCs determines your negotiating position more than any tactic
Feld and Mendelson argue that the single most powerful thing a founder can do to improve the terms of their deal is to create competition among multiple VCs. Choice is power. Having multiple VCs interested provides insight into how different firms work and gives negotiation leverage to improve terms.
The fundraising process should be approached with the same strategic rigor as building the business. This starts with determining the exact amount to raise, since raising too much leaves you short of your goal while raising too little leaves money on the table. The amount drives which VCs to target, since different firms write different check sizes. Never use ranges because they make you look uncertain and muddy your targeting.
The process of creating competition requires careful timing and synchronization. Allow three to six months for the entire process. Start earlier and you will lack urgency; start later and desperation will show. As you engage with VCs, understand each firm's process and timeline so you can synchronize the delivery of term sheets. Categorize every VC interaction into one of four buckets: clearly interested leaders, clear passes, maybes who are hanging around waiting, and slow nos who never actually say no but are completely reactive.
The authors emphasize that fundraising attitude matters. Enter every fundraising with a mind-set of presumed success. When founders say they are testing the waters or exploring options, it signals failure. At the same time, never overrepresent competition that does not exist, because getting caught destroys credibility and leverage.
The best alternative to a negotiated agreement (BATNA) is the entrepreneur's greatest asset. Spend as much time developing your BATNA as on the primary negotiation itself.
- Choice is power. Having multiple VCs interested provides insight into how different firms work and gives negotiation leverage to improve terms.
- Do. Or do not. There is no try. Enter fundraising with a mindset of presumed success. Saying you are 'testing the waters' signals failure.
- State a specific fundraising amount, never a range. Ranges make you look uncertain and confuse targeting since a $5 million round and a $7 million round may attract different lead investors.
- Never overrepresent competition that does not exist. Honest negotiation is paramount. If you get caught bluffing about competing term sheets, you lose your existing investor and all leverage.
- Spend as much time on your best alternative to a negotiated agreement (BATNA) as on the primary negotiation. A great Plan A has a great Plan B standing behind it.
- Your biggest advantage is to have a solid Plan B. VCs will fold on all peripheral terms if you have another comparable quality VC waiting.
- The average length of a relationship between a VC and founder is on par with the average length of a marriage. Choose your investor like you would choose a life partner.
- Determine the Exact Amount to RaiseFocus on the length of time needed to reach the next meaningful milestone, multiply by monthly burn rate, and add a time cushion. State a single specific number, not a range. If you are a seed-stage company needing $500,000, do not go out asking for $1 million, because being at $250,000 committed on a $1 million raise signals weakness. Being at $400,000 on a $500,000 raise signals an oversubscribed round.Pro tipIf you end up with more investor demand than anticipated, you can always raise a larger amount. It is far better to state a specific number and oversubscribe than to state a range and appear uncertain.WarningComplex financial models that determine the exact amount needed down to the penny will be wrong. Instead of precision, focus on a reasonable estimate that gets you to a clear point of demonstrable success.
- Target the Right VCs and Create a Synchronized ProcessResearch which VCs invest at your stage, in your sector, and at your check size. Use your network and other entrepreneurs to get warm introductions. Allow three to six months for the full process. As you engage with multiple VCs, understand each firm's process and timeline, then bias your energy toward the firms with longer processes to synchronize term sheet delivery.Pro tipSome VCs will ask who else you are talking to. Never answer this question early in the process. If you do, the next email the VC sends will be to someone at those firms asking what they think of you and your deal.WarningThe most common mistake entrepreneurs make is focusing on firms irrelevant for their current stage. A seed-stage company pitching a late-stage fund wastes precious time and energy.
- Categorize VC Interest and Focus Energy AccordinglyAs you meet VCs, categorize each into one of four groups: leaders who are clearly interested and want to lead, passes who say no, maybes who seem interested but do not step up engagement, and slow nos who never say no but are completely reactive. Engage aggressively with leaders. Ignore passes. Keep maybes warm as potential syndicate participants. Treat slow nos as a no and stop spending time with them.Pro tipIf a VC passes, politely insist on feedback about why. This is one of the most important lessons an entrepreneur can learn during the fundraising cycle. Absorb the feedback and learn from it.WarningThe slow no is the hardest to deal with. These VCs never say no but are completely in react mode, always leaving you pushing on a rope. Spending time on them is almost always wasted.
- Close the Deal EfficientlySeparate closing into two activities: signing the term sheet and signing definitive documents. Most executed term sheets result in a completed financing. Once a term sheet is signed, be responsive with due diligence requests, manage your lawyers daily, and do not let legal teams create unnecessary tension. Never assume that because your lawyer says the other side is horrible that the VC even knows about the issue. Make a call or send an email to find out what the real story is.Pro tipDeal with any messy issues up front before signing. If a VC forgets to ask about something early on, assume they will ask before the deal closes. Being transparent builds trust and prevents deal-killing surprises.WarningLater-stage firms sometimes have an investment committee that must approve deals after the term sheet is signed. Multiple cases exist where signed term sheets were not approved by the committee, leaving companies stranded. Understand the approval process before signing.
A seed-stage company needs $500,000 but goes out asking for $1 million. When asked how much is committed, they say $250,000, making angels feel the round will never close. Contrast this with a company raising $500,000 that says they are at $400,000 with room for one or two more investors. The second framing creates urgency and signals success, because most investors love being part of an oversubscribed round.
After learning about negotiation leverage from the authors at a Techstars program, a 20-something first-time entrepreneur named Alex White waited until two hours before Jason Mendelson left on vacation to negotiate the term sheet. Jason did not even recognize this as a strategy and attributed it to bad luck with timing, giving concessions under artificially manufactured time pressure.
This framework comes from Feld and Mendelson's experience on both sides of the fundraising table. As VCs, they raise money from limited partners and experience the same frustrations entrepreneurs face. As investors, they see the dramatic difference in outcomes between founders who run a tight competitive process and those who engage with VCs one at a time.