Sometimes the best way to learn is by observing.
That’s why four professionals — Barbra Barnett and David Rieveschl of Stone Pigman, Randy Mire of Capitol Wellness Solutions and Rick Babb of Louisiana Funds — staged a mock negotiation scenario for entrepreneurs attending BREW 11.
The exercise demonstrated key terms and issues entrepreneurs should be aware of as they pursue funding opportunities to take the next step in growing their businesses. While the investment process is an exciting time for business owners, especially when dealing with large amounts of capital, securing an adviser who can help interpret and negotiate with investors can mean the difference between success and failure.
“Negotiating these investments is complicated. There are a lot of moving parts, and the different levels of experience are vast,” says Rieveschl, who specializes in corporate and business law, mergers and acquisitions, and securities law for Stone Pigman. “Entrepreneurs are smart people, but they may raise money two or three times. [Venture capital firms] do it every day.”
Setting the Scene
The scene featured Awesome Ventures, a fictional venture capital fund represented by Barnett and Babb, and NewCo, a fictional startup battery company represented by Rieveschl and Mire. Both parties negotiate over a term sheet — the agreement between the company and the investor that lays out the investment terms.
“A lot of it [the terms] does relate to the valuation. When we invest, we have different ways of structuring these deals,” says Babb, who has 30 years of diverse experience in business, accounting and financial management. “When the valuation is high, we tend to have sticks. When the valuation is low, we can put some carrots in there. Do you want a stick, or do you want a carrot?”
The first part of the mock negotiation scenario centered on the economic terms of the fictitious investment — dividends, liquidation or dissolution of the company, stock redemption rights and more.
The main objective for Awesome Ventures is to make their investment back plus a profit. Unlike an individual investor, a VC firm must gain a significant profit to satisfy its own investors. Dividends — a portion of a company’s profits paid out to shareholders annually — are one opportunity to net those gains.
Investors also want to secure that profit if the company sells through liquidation or dissolution, so the terms surrounding these issues are often the subject of fierce negotiation.
“The reason why somebody like Rick invests in a startup is to get his money back and have a return on the investment and be able to pass that return on to his investors,” says Barnett, who specializes in securities, mergers and acquisitions, and corporate and business law for Stone Pigman. “So really, what we are looking for is an exit. Any event where we can liquidate our investment and get that cash out.”
The second set of terms addressed in the mock negotiation scenario are known as control terms — the method investors use to exercise some control over the company they are investing in. These terms include covenants, seats on the board of directors and more.
“As a board member, you only have so much influence on a company. We’re never going to be day-to-day,” Babb says. “We’re going to be involved in strategy and holding the company accountable.”