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Negotiating with VCs: Navigating the Founder’s Dilemma

Chris Corbishley


Negotiations can be daunting. Whether you’re convincing a senior hire to join the founding team, deciding terms with suppliers or drafting customer sales agreements, it’s about cooperation, not conflict. When raising investment, entrepreneurs face an additional trade-off known as the ‘Founder’s Dilemma’. By understanding this better, it's possible to navigate the process openly and effectively.

Key takeaways:

  • Get inside each other’s heads. Don’t make assumptions. Ask questions and listen.

  • When negotiating price, focus the discussion on value, not on valuation.

  • When negotiating terms, understand trade-offs inherent in the Founder's Dilemma.

  • Pick up the phone. Open and frequent communication keeps everyone close.

  • Don’t leave terms lingering in the ether. Time kills deals.

Fighting over lemons

The “lemon game” (often interchangeable with oranges), is used in negotiation training by business schools worldwide. The game divides the class into three parties, each of whom are set up to assume they’re in for a tough negotiation.

One group (the sellers) represents the lemon growers, who forecast their yield over the next 5 years, set their constraints and present some terms on price and delivery. As for the two other groups (the buyers), one is an ‘up and coming’ lemonade producer with more demand than it can satisfy, and the other, a large bakery selling the best lemon drizzle cake on the market. Each have their own optimistic forecasts for customer demand, specific seasonality constraints and sensitivities around price (sales margins).

A crucial factor in these negotiations, which becomes clear in the supplier’s presentation, is there aren’t enough lemons to satisfy the demands of each buyer. This sets up an adversarial situation, characterised by conflict (fuelled by the desire of all parties to maximise profits) and uncertainty (due to information asymmetry inherent within the situation).

Unsurprisingly, this brings out confrontational, even aggressive behaviour amongst participants, where after successive number crunching, and ‘slow reveals’ around each party’s limits on volume and price, each party is left fighting over an empty biscuit tin.

Nine times out of ten, both groups of buyers fail to recognise that the cake manufacturer requires only the lemon peel, and the lemonade company requires only the juice. There’s a win-win outcome for those who ask the right question.

The moral of the story is that negotiations are never a zero-sum game. You should approach them, not as a conflict but as cooperation, and never assume anything. Get inside the other party’s head to understand their needs, wants and fears. Be open about the things that matter, ask questions and listen.


Making choices

A concept called the ‘Founder’s Dilemma’ reveals the importance of making some hard choices before even approaching VCs for investment.

As startups grow, entrepreneurs face a dilemma. On the one hand, they must raise resources to grow their business. If they choose the right investors, they can outperform.

In fact, HBS research suggests a founder who gives up more equity to attract good people and investors build a more valuable company than one who parts with less equity, and the founder ends up with a more valuable slice, too.

On the other hand, in order to attract investors and executives, founders must give up a degree of control over decision making as a quid pro quo.

(Noam Wasserman, 2008)

This tension creates a trade-off between founders who want to be “rich” versus those who want to be “king”. While the “rich” options enable the founder to build a more valuable business, it can leave a sour taste for those who want total autonomy and control.

For founders, one choice is not necessarily better than the other; what matters is how well each decision fits with the funding options they are going after, as well as their reason for starting the company. For instance, founders in the lower left quadrant who want “no strings attached” are likely less suitable for the VC funding route  suitable candidates for VC investment, hence angel investment would be a better fit.


Negotiating Price. Negotiating Terms

Assuming both parties are interested in moving forward, there are two points that founders often wish to negotiate: Price and terms. It is rare that either party will go hot and heavy on both, and there are often a few nips and tucks along the way to help ensure mutual agreement.

Most terms (vesting schedules, board seats, decision-making checks), touch on this point of control. There are some termsheets that can make early stage founders (and investors) shudder. Fortunately, many  will have reasonable measures to ensure an appropriate level of governance designed to protect their investment. We’ve published our termsheet in order to expedite these discussions and for founders to get a feel about how we operate through the deal process ahead of offering terms.

Valuation can be a nebulous concept for founders (and investors). An important thing to bear in mind is that early stage investments are true partnerships. These are relationships that can last 10+ years. Similar to the lemon game, no one party stands to gain from leaving another ‘hard done by’. It is in everyone’s  interests to avoid disincentives. Fund economics and minimum return requirements aside, when negotiating price, VCs (and founders) should always focus the discussion on value, and not on valuation.

Exploding termsheets

Finally, when you get that offer, it is important to move quickly. It is not good practice for either party to keep terms lingering. Founders want to get back to the business of building their business, and investors hope for the same. For this reason, many termsheets will have expiry dates in order to keep the pace in the deal process.

Pick up the phone

One of the most striking observations (from someone who has played the lemon game) is just how important open and frequent communication is to the deal process. Information asymmetry can can lead to all manner of misunderstandings and if left for too long, a breakdown in trust. If appropriate, call investors out, request some ‘radical candour’ and if there’s an inkling of doubt or concern about the business plan, the market or the product, multiply that inkling by 10 and look to address them in future meetings.

Sometimes (if not, always) picking up the phone and chatting through terms, concerns and legals can be far more effective than exchanging long-winded emails.


Further reading:

Chris Corbishley


Chris previously founded growthsquared.io a data science consultancy on a mission to help e-commerce businesses apply advanced analytics to their data and/or operating model. Before that, he was Head of Analytics at Swoon Editions, a business championing the "zero stock, zero lead time” model in online furniture retail. Chris undertook a PhD in organisational economics at Imperial College London, focussing on how public and private organisations structure themselves to deliver affordable energy services to the poorest parts of India and East Africa.

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