Let`s take an example that relates to two of the items that are often written on a spreadsheet: liquidation preference and participation. The liquidation preference gives a venture capital firm the right to recoup its investment (or a multiple set of it) at the point of sale or in the case of another liquidity event before the founder knows a return. The participation relates to the question of whether the VC is entitled to a share of the remaining value after the payment of the liquidation preference. Liquidation preferences are often set one to two times more than investment and participation cannot range from any to full quantity. Imagine a VC investing $2 million for a 20% share in a start-up, which is an estimate of $10 million. It negotiates a 2x liquidation preference and full participation rights. This means that if the business is sold for $14 million, it will receive double its investment ($4 million) plus 20% of the remaining $10 million ($2 million) for a total of $6 million. In other words, it will receive almost 43% of the selling price, while its share was only 20%. Note that the $10 million valuation in itself has little influence on how assets are ultimately distributed. Even a single $2 million investment on a much lower valuation – say $8 million – would not change the final distribution; 46% of the sale price of the VC. It`s a clear reminder that if you focus solely on valuation, if you`re trading a deal, you might be fighting for something that may not give you what you want at the end of the day. Participation is more of a lottery ticket than an insurance.

When a company makes greatness, VC`s participation gives a huge gust of wind – so a VC that focuses on full participation can project optimism about the ultimate destiny of the start-up. A VC that focuses on board seats, voting rights or other terms that define control may be less confident in the management team and perhaps think about when it will be replaced. There is nothing inherently wrong with any of these situations, but a careful understanding of the dynamics can help founders ask better questions, conduct a more productive dialogue about expectations and ensure that they choose the right partner when they have their own goals. VCs ask you for better terms, buy a comparison shop and use the lever you have, but not after you`ve reached an agreement. It may seem obvious that this founder acted in a dishonest and unethical manner, but in the febrile tone of deal-making, even intelligent and well-meaning people may lose sight of the fact that VV negotiations, among all financial agendas and projections, are a process in which people decide who they want to connect to for years to come. In relationships with VC, as in any long-term partnership, it is much easier to build trust than to rebuild it. If you realize that you have set yourself on terms without sufficient consideration, or that you have made commitments that you cannot keep, you`d better play it directly: “I think I may have agreed to something I don`t really feel comfortable with.” This will be an unpleasant conversation and the VC may not be ready to resume the debate. But there is a good chance that you will have a better result than if you do not make your promises if they become expensive or uncomfortable. Venture capital is a small industry, and as one entrepreneur says: “In my sector, you don`t have a CV.

You just have your reputation. VC-Entrepreneur partnership agreements often contain loopholes that become very damaging when the parties face questions of power, trust and much more. Yet many defects are systematic and predictable – and therefore preventable. The author, a long-time advisor in the VC industry, outlines four recommendations for entrepreneurs sitting at the table with potential funders. (8) Disclosure of relevant information may be made to individuals, organizations, individuals,