Far more is negotiable than a founder of startup think. For instance, a normal ploy of the lawyers representing the investors is to insist that "this is our boilerplate" and that the founder should take or leave it. It is possible for a founder to negotiate and craft an agreement that represents his or her needs. During the negotiation, the investors will be evaluating the negotiating skills, intelligence, and maturity of the founder. The founder has precisely the same opportunity to size up the investors. If the investors see anything that shakes their confidence or trust, they probably will withdraw from the deal. Similarly, if an investor turns out to be arrogant, hot tempered, unwilling to see the other side's needs and to compromise, and seems bent on getting every last ounce out of the deal by locking a founder into as many of the burdensome clauses as is possible, the founder might want to withdraw.
Throughout the negotiations, the founder needs to bear in mind that a successful negotiation is one in which both sides believe they have made a fair deal. The best deals are those in which neither party wins and neither loses, and such deals are possible to negotiate. This approach is further articulated in the works of Fisher and Ury, who have focused neither on soft nor hard negotiation tactics, but rather on principled negotiation, a method developed at the Harvard negotiation Project. This method asserts that the purpose of negotiations is to decide issues on their merits rather than through a haggling process focused on what each side says it will and will not do. It suggests that founders should look for mutual gains whenever possible, and that where the interests conflict, the founders should insist that the results be based on some fair standards independent of the will of either side.
The focus of negotiations will likely be on how much the startup's equity is worth and how much is to be purchased by the investor's investment. Even so, numerous other issues involving legal and financial control of the company and the rights and obligations of various investors and the startup in various situations maybe as important as valuation and ownership share. Not the least of which is the value behind the money - such as contacts and helpful expertise, additional financing when and if required, and patience and interest in the long term development of the startup, that a particular investor can bring to the startup. The following are some of the most critical aspects of a deal that go beyond the financial issues:
1. Number, type, class, and mix of shares and debt and various features that go with them (such as puts) that affect the investor's rate of return.
2. The amounts and timing of takedowns conversions, and the like.
3. Interest rate in debt or preferred shares.
4. The number of seats, and who actually will represent investors, on the Board of Directors.
5. Possible changes in the management team and in the composition of the Board of Directors.
6. Registration rights for investor's shares in case of initial public offering.
7. Right of first refusal granted to the investor on subsequent private or initial public share offerings.
8. Shares vesting schedule and agreements.
9. The payment of legal, accounting, consulting or other fees connected with putting the deal together. Founders may find some subtle but highly significant issues negotiated. If they, or their lawyers, are not familiar with these, they may be missed as just boilerplate when, in fact, they have crucial future implications for the ownership, control, and financing of the startup. Some issues that can be burdensome for founders are:
10. Co-sale provision - this is a provision by which investors can tender their shares before initial public offering. It protects the first round investors but can cause conflicts with investors in later rounds and can inhibit founder's ability to case out.
11. Ratchet anti-dilution protection - which enables the lead investors to get for free additional common shares is subsequent shares are ever sold at a price lower than originally paid. This protection allows first round investors to prevent the startup from raising additional necessary funds during a period of adversity for the startup. While nice from the investor's perspective, it ignores the reality that, in distress situations, the last money calls the shots on price and deal structure.
12. Washout financing - is a strategy of last resort which wipes out all previously issued shares when existing preferred shareholders will not commit additional funds, thus diluting everyone.