Entrepreneurs often find themselves in high-stakes negotiations with big, savvy players, with significant negotiating power (referred to herein as “Big Boys”) — whether it be a venture capital firm in connection with a financing or a private equity firm in connection with the sale of the entrepreneur’s business; the situation can indeed be daunting. Below are ten tips for entrepreneurs to help them through this process.
1. Retain a Strong Team. In dealmaking as in business, you are only as good as your team. Accordingly, the first step for the entrepreneur is to retain a strong transaction team — and the quarterback of the team should be an experienced corporate lawyer. Indeed, an experienced corporate lawyer will not only add value to the transaction, but also can help the entrepreneur build-out the team and tailor it to the particular deal (e.g., in an acquisition, a strong tax lawyer is imperative to help structure the deal or in a licensing transaction, a strong IP lawyer is often necessary, etc.). The Big Boys are generally represented by large, aggressive law firms, and the entrepreneur must ensure that his/her team is up to the task.
2. Do Your Diligence. Due diligence is often a critical component to any deal. One form of diligence that is often overlooked, however, is an investigation of the guys on the other side of the table. What’s the reputation of the Big Boy — e.g., is this a venture capital or private equity firm that treats its portfolio companies well or is this a firm that squeezes the little guy? What about the particular individuals with whom you are dealing? What are their reputations? Are they good guys with whom to partner or are they jerks? Indeed, the web is a good starting point for the entrepreneur who needs background information on a particular firm/individual. At a minimum, the entrepreneur should track down other entrepreneurs or CEO’s who have done deals with the guys on the other side of the table and make an informed judgment as to whether they are guys with whom the entrepreneur wants to do business.
3. Create a Competitive Environment. There is nothing that will give the entrepreneur more leverage in connection with any negotiation with a Big Boy than a competitive environment (or the perception of same). Indeed, every investment banker worth his salt understands this simple proposition. Accordingly, a start-up seeking a Series A round financing from a venture capital firm, for example, will clearly be more appealing if such firm learns that other venture capital firms are interested in the start-up. Not only does competition validate a firm’s thinking, but also it appeals to the human nature of the individuals involved. Indeed, everyone wants what he doesn’t have and/or what someone else wants. The entrepreneur will have strong leverage with respect to price and other material terms as competitors are played off of each other and will thus strike the best possible deal. One caveat: as discussed below, it is probably best left to a strong corporate lawyer to play this game on behalf of the entrepreneur; indeed, this strategy must be played carefully and is better-handled by someone with experience.
4. Run the Negotiations Through the Lawyers. The entrepreneur should do what he does best — i.e., build companies — and leave the negotiating to a strong corporate lawyer. Entrepreneurs are generally no match for sophisticated venture capitalists or private equity or corporate development guys who do deals for a living. Accordingly, a smart entrepreneur will stay above the fray and let his corporate lawyer run the deal. The Big Boys may try to do an end-run around the entrepreneur’s lawyer (and may even criticize the lawyer and try to turn the entrepreneur against him), but the entrepreneur should remain disciplined and avoid “side-bar” negotiations with the principal(s) on the other side. This approach is particularly important where the entrepreneur will have an ongoing relationship with the other side post-closing; the goal is thus not to poison that relationship with testy, acrimonious negotiations (i.e., let the lawyers fight it out).
5. Develop a Game Plan. Every deal is different — different players, different negotiating leverage, different risks, different timing — and it is thus critical that the entrepreneur sit down with his transaction team and strategize; in short, he must develop a game plan and then attempt to execute the plan. Indeed, doing deals is no different than any other project: the entrepreneur must think through the issues with a smart, experienced team, set reasonable milestones and then monitor the progress. Rigorous analysis throughout this process is paramount.
6. Be Careful with LOI’s. A letter of intent (an “LOI”) — sometimes referred to as a term sheet or memorandum of understanding — is often executed in connection with all types of deals. The entrepreneur must understand that, depending on the deal and the context, there are different LOI strategies and considerations that must be addressed. For example, in the acquisition context, a selling entrepreneur should try to negotiate all of the material terms of the deal in the LOI when the entrepreneur’s leverage is the strongest; on the other hand, a buying entrepreneur’s main goal with respect to the LOI is merely to lock-up the seller and prohibit it from shopping the deal for a reasonable period of time. Another major concern with respect to LOI’s is that they may be deemed enforceable by a court of law (i.e., be deemed a binding agreement) — despite express language in the LOI to the contrary. The lesson here is simple: an LOI should not be executed without the advice of competent counsel.