What’s the best way to negotiate with an investor?

Paul Graham (Co-Founder & Partner at Y Combinator)
How to Raise Money

If someone makes you an acceptable offer, take it. If you have multiple incompatible offers, take the best. Don’t reject an acceptable offer in the hope of getting a better one in the future.

Y Combinator (a startup accelerator based in Mountain View, CA.)
The Handshake Deal Protocol

Silicon Valley runs on handshake deals. A handshake deal is a verbal commitment to a transaction. The actual transaction comes later, when documents are signed and money changes hands. Why do we need handshake deals? Why not just wait till the actual transaction? Because things can happen fast in the startup world.

Y Combinator (a startup accelerator based in Mountain View, CA.)
The Handshake Deal Protocol

We’re going to start using this within YC, and we hope it will spread to the rest of the startup community. The protocol defines an offer as an amount to be invested, plus a valuation or valuation cap (or no cap), plus an optional discount. Here are some example offers: $100k at $5 million pre-money. $100k at a $5 million cap. $100k uncapped. $100k uncapped with a 10% discount. According to the protocol, you have a handshake deal if and only if t… (read more)

Paul Graham (Co-Founder & Partner at Y Combinator)
How to Raise Money

[Get the investor’s] yes/no before valuation.

Ryan Howard (Founder @ Practice Fusion)
Transcript: Protecting yourself as the founder; Ryan Howard | VatorNews

For me, one of the things I think is really key is to always think about your downside. If this all ends today, not even if you’re fired, if the company goes out of business today, what do I have left, what do I have in my bank account? Can I get any liquidity from the equity? What’s really key here is that California is at-will so effectively, once you form your company, you start taking on investors and you no longer have control of the board. … (read more)

Paul Graham (Co-Founder & Partner at Y Combinator)
How to Raise Money

If you’re experienced at negotiations, you already know how to [negotiate well]. If you’re not, there’s a trick you can use in this situation. Just confess that you’re inexperienced at this and ask how their process works and where you are in it.

Paul Graham (Co-Founder & Partner at Y Combinator)
How to Raise Money

Many investors will ask how much you’re planning to raise. This question makes founders feel they should be planning to raise a specific amount. But in fact you shouldn’t. It’s a mistake to have fixed plans in an undertaking as unpredictable as fundraising.

Paul Graham (Co-Founder & Partner at Y Combinator)
How to Raise Money

If you’re surprised by a lowball offer, treat it as a backup offer and delay responding to it. When someone makes an offer in good faith, you have a moral obligation to respond in a reasonable time. But lowballing you is a dick move that should be met with the corresponding countermove.

Paul Graham (Co-Founder & Partner at Y Combinator)
How to Raise Money

Another advantage of having one founder take fundraising meetings is that you never have to negotiate in real time, which is something inexperienced founders should avoid. One YC founder told me: Investors are professional negotiators and can negotiate on the spot very easily. If only one founder is in the room, you can say “I need to circle back with my co-founder”

Paul Graham (Co-Founder & Partner at Y Combinator)
Investor Herd Dynamics

One reason investors like you more when other investors like you is that you actually become a better investment. Raising money decreases the risk of failure. Indeed, although investors hate it, you are for this reason justified in raising your valuation for later investors. The investors who invested when you had no money were taking more risk, and are entitled to higher returns. Plus a company that has raised money is literally more valuable.

Paul Graham (Co-Founder & Partner at Y Combinator)
Investor Herd Dynamics

Only raise the price on an investor you’re comfortable with losing, because some will angrily refuse.

Paul Graham (Co-Founder & Partner at Y Combinator)
Investor Herd Dynamics

VCs will sometimes ask which other VCs you’re talking to, but you should never tell them. Angels you can sometimes tell about other angels, because angels cooperate more with one another. But if VCs ask, just point out that they wouldn’t want you telling other firms about your conversations, and you feel obliged to do the same for any firm you talk to

Paul Graham (Co-Founder & Partner at Y Combinator)
Founder Control

A lot of VCs still act as if founders retaining board control after a Series A is unheard-of. A lot of them try to make you feel bad if you even ask—as if you’re a noob or a control freak for wanting such a thing. Founders retaining control after a Series A is clearly heard-of.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Doing Business On A Handshake – AVC

I often wish we could do business on a handshake.
I’ve been thinking about it more and more these days. We negotiate a sophisticated set of documents when we invest in a company and for the most part, those documents never come into play. Many times when things go badly, we rip up the documents and decide what to do based on an honest discussion among the interested parties. When things go well, all we need are the stock certificates.

Bruce Gibney (Former Partner @ Founders Fund)
Peter Thiel’s CS183: Startup – Class 8 Notes Essay

Be careful about your voting structures, as well; these too are hard to change.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
My First Investment – AVC

That deal taught me a few big lessons. The first is to avoid complicated deals. It seemed like such a smart deal structure but it really wasn’t. The second is to avoid fast talking salesy entrepreneurs who don’t know how to operate a business. That more or less described the entrepreneur who was running SDC when we did the initial deal.

Paul Graham (Co-Founder & Partner at Y Combinator)
High Resolution Fundraising

Different terms for different investors is clearly the way of the future. Markets always evolve toward higher resolution. You may not need to use convertible notes to do it.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
The Pro-Rata Participation Right – AVC

The “pro-rata right” is the right to continue to participate in future rounds so that you can maintain your ownership. Let’s make it concrete with an example. You invest $50k in a seed round at a $5mm cap and own 1% of the company. The next round is a $3mm round at $9mm pre, $12mm post. If you don’t participate, you will be diluted 25% and will then own 0.75% of the company. On the other hand, if you buy 1% of the round, a $30k investment, you wi… (read more)

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Because It’s Standard – AVC

I never ever say that a specific provision is “standard”. Nothing is standard. You either need it or you don’t. Explain why you need it and most of the time you’ll get it or something like it as long as both sides really want to make a deal.

Sam Altman (President at Y Combinator)
Before Growth – Sam Altman

When I invest (outside of YC) I make offers with the following term sheet. I’ve tried to make the terms reflect what I wanted when I was a founder. A few people have asked me if I’d share it, so here it is.

Y Combinator (a startup accelerator based in Mountain View, CA.)
The Handshake Deal Protocol

Investors will sometimes try to make a deal to invest, say, $50k to $150k. If a startup agrees to that, they’re obliged to save $150k of space but the investor is only obliged to invest $50k. An offer to invest a range of money is really two separate things: an offer to invest the bottom end of the range, plus an expression of interest in possibly investing more. So we suggest startups respond to each separately: do a handshake deal for the botto… (read more)