When startup founders review the VC clause list, most of them are only interested in prepayment valuation and board composition. They think the rest of the language is "standard" and they don't want to cheat their new VC partners by "nicking and targeting details." But these details are really important.
Venture capitalists are savvy and experienced negotiators, and all the languages included in the list of terms are there because it is important to them. In the vast majority of cases, every benefit and protection that a venture capitalist gets in the list of terms will result in the loss or sacrifice of some founders – either transferring some control from the founder to VC or taking the risk from VC gives the founder, or provides financial benefits to VC and away from the founder. You may have more leverage to get better terms than you think. We are in the era of record capital inflows into the venture capital industry, with more and more companies targeting seed stage companies. This kind of competition makes it harder for venture capital firms to stipulate the terms in accordance with established practice.
However, like any negotiating partner, venture capitalists may assess your acumen when approaching the proposed list of terms as they evaluate their efforts to promote the terms. If VC thinks you are naive or green, they can easily use this to negotiate favorable terms for themselves. So what is really important when negotiating a list of terms? As a founder, you want to get rid of financing through comprehensive control of the company and the flexibility to shape the future flexibility of the company and the share of the company's future economic prosperity as much as possible. With these principles in mind, let's look at the four specific issues in the list of terms that are often overlooked by the founders and corporate legal counsel:
- The Importance of Prepaid Capitalization
- CEO, Co-Director
- Deferred clause
- Liquidation priority.