You're negotiating with founders who alter their equity terms. How do you navigate this unexpected change?

Nestes 11 anos que atuo no ecossistema, e 61 startups investidas, já encontrei vários tipos de empreendedores. Alguns mais falantes, outros mais calados . Alguns mais extrovertidos, outros mais introvertidos O que não é uma questão de temperamento são as mudanças abruptas , após assumir compromissos O que os empreendedores não deveriam fazer , para o bem de suas reputações : • não mentir para os potenciais investidores , quando perguntado se está em tratativas com outros • não assumir compromisso de captar investimento com um investidor, e captar com outro A construção de reputação no ecossistema é árdua e demorada , mas pode ser destruída em pouco tempo , dependendo do comportamento pessoal e empresarial dos empreendedores

Negotiations where your investment means you will be "in bed" together for a while are, in the framework of game theory, infinitely repeating games rather than zero sum. That means the objective is to find win/win solutions rather than a screw your buddy solution. Thus I begin with the simple question "Why the change?" Only if I understand the fact situation and motivation can I determine what do to. If the fact situation and motivation are reasonable, I go back to my list of "Must Haves" "Nice to Haves" and "No Way in Hell". If the change does not affect my Must Haves and No Way in Hell, I try to negotiate to get a Must Have, Nice to Have, or avoid a No Way in Hell for accepting it, but again, remember why you are there before walking.

Stay calm, gather info. Ask why terms changed & for new proposal details. Assess impact: is it fair based on contributions? Negotiate for alternative terms (higher % for smaller stake, vesting changes) or walk if unfair. Transparency & clear communication are key.

As an investor, it's crucial to assess the impact of altered equity terms on the overall deal structure. This includes evaluating how the changes affect your ownership percentage, potential return on investment, and control over decision-making. Additionally, consider how the changes might impact other investors in the round, as their interests and expectations need to be taken into account. A comprehensive assessment of the altered terms allows you to negotiate effectively and ensure a fair and balanced outcome for all parties involved.

As an investor, it's crucial to assess the impact of altered equity terms on the overall investment thesis. This involves evaluating whether the new terms align with your investment strategy and risk tolerance. If the changes significantly alter the deal's risk-reward profile or deviate from your initial investment thesis, you may need to reconsider your position and explore alternative options.

Communicate openly with founders to understand the reasons behind altering equity terms. Explore their business goals, financial needs, and external factors influencing their decision. By understanding their motives, you can negotiate from a position of empathy and find mutually acceptable solutions.

Evaluate the New Terms That are Proposed. Assess Fairness: Determine if the new terms are fair and reasonable in light of the company’s current status and future prospects. Compare to Market Standards: Benchmark the new terms against industry standards and similar deals to ensure they are competitive.

When founders alter equity terms, it's crucial to understand their reasoning. Start by initiating a candid discussion to explore their motivations. For instance, like a scenario where founders adjusted terms based on new market insights. They might have learned from other investors or pivoted their business model. By comprehending their perspective, you can assess if it fits your investment strategy. This understanding allows you to address their concerns thoughtfully while protecting your interests. In such a dialogue, aim to create a win-win situation, showing flexibility where possible but remaining firm on key aspects that ensure a successful partnership.

Understand why the company wants to alter deal terms. Is it because there's another deal on the table that you're now up against? Is the founder looking at this like a transaction and a best deal for them vs. working with the right firm long term? Show why you are the best firm to work with long term and the value you and your firm can add long term.

Initiate renegotiation discussions to address the revised equity terms. Focus on maintaining fairness and transparency while protecting your investment interests. Collaborate with founders to find equitable adjustments that align with both parties' expectations and support long-term partnership and growth.

Negotiate Constructively All the Time. Be Transparent: Clearly communicate your own interests and concerns regarding the new terms. Find Common Ground: Work collaboratively to find a middle ground that satisfies both parties. Be open to compromises that still align with your investment strategy.

As with every nuanced question, probably best to start with understanding why they moved the goal post. 1. Understanding why they changed terms might be helpful to seeing their rationale - it might be for a reason that makes sense when explained 2. Did they approach it the discussion from a place of good intent - I.e., was it more a hard line goal post move or approached it as a dialogue to reach a newly agreed position? While cases for and against this make sense, absolutes often lack context. Yes, a verbal agreement should be able to be counted on and given the venture relationship is based on trust, this is a huge flag that should be taken seriously. However, flexibility is also key in any business with people at the heart of it.

When founders change equity terms, approach renegotiation with a collaborative mindset. For example, if the new terms are unappealing, express your concerns clearly, highlighting how they impact your investment goals. Propose alternatives that could bridge the gap. For instance, suggest a modified valuation or equity percentage that balances risk and reward. You could also negotiate adjustments in voting rights or exit strategies. The key is to remain flexible and creative, aiming for solutions that align both parties' interests, ensuring a solid foundation for a successful partnership.

Draw on existing relationships and trust to navigate changes collaboratively. Foster open communication, emphasize mutual goals, and prioritize preserving the founder-investor relationship. By leveraging strong relationships, you can navigate negotiations effectively, maintain trust, and sustain positive dynamics throughout the process.

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Seek & Provide Clarification. Ask for Details: Request specific details on why the equity terms were altered and what new terms they are proposing. Understand the Rationale: Understand the underlying reasons for the change, whether it's due to new developments, additional investors, or reevaluation of company value.

Unexpected changes happen in VC every day, even in my work. Use time wisely, and be prepared for Plan XYZ. If possible, take time to carefully consider the new terms rather than making immediate decisions. Ensure that any agreed-upon changes are properly documented in writing to avoid future misunderstandings or disputes.

If deal terms have been agreed upon (handshake or more) and the founder changes the terms without proactively discussing with the investor, then the investor should walk away from the deal. If the deal terms were not agreed on firmly yet but the terms 'discussed' are changed, then the investor should have a direct conversation with the founder to better understand the situation and be open to a new scenario. For example when a founder wants to bump up the valuation because the total size of the round increased. But the hardest part is the grey area when the investor thought they had a deal while the founder was still shopping around for a better offer. The best thing to do is keep open communication and also be ready to walk away.

I walk away. This has hurt me before where I have strong conviction the company will succeed, and it hits me hard years later when I’ve seen them exit. But I’ve chosen my own ethical principals, and also believe that this allows me to work with true integrity with my other partners and companies, and attract the type of founders that honor their word and deliver value.

This prompt doesn’t quite align with the market. If you’re still negotiating, you’re still negotiating. The only way founders “alter their equity terms” during a negotiation is to change something that has already been agreed, i.e. in a terms sheet. Founders should know that changing a term in the terms sheet jeopardizes the deal and relationship. Many (perhaps most) investors will walk. Therefore, founders do not simply alter equity terms. They should have a very good explanation, like that new information has come to light or circumstances have changed. If founders demand to alter terms, that shows lack of business acumen, a big red flag. Without a compelling explanation and tone of supplication, I’d consider walking away.

Analyze the revised terms' impact on your ownership and returns. Remember, you bring more than just cash - network, expertise, strategy. Negotiate a solution that benefits both. But, be prepared to walk away if the value proposition crumbles.