Luisa Rubio Arribas
More posts from Luisa Rubio Arribas
As venture capital flows continue to fluctuate, founders have to double down on the terms they agree on. While it can be tempting to overlook certain terms for the sake of closing a deal, founders should remember that nearly everything in a deal is negotiable.
A lot of entrepreneurs tend to focus only on the company’s valuation during talks, but often, other clauses in the contract can be far more impactful. The problem is that founders in the early stages of their business often don’t want to hire lawyers because of the cost involved, so they don’t have the legal knowledge or experience to negotiate the best possible deal.
But when you’re dealing with corporate venture capital (CVC), where firms have seasoned, dedicated legal teams, founders need to enter negotiations with an understanding of the legal dynamics. Doing so will enable them to be creative with their requests and implement more effective terms for both sides.
Drawing from my legal expertise as head of Wayra X, Telefónica’s investment vehicle and conversations with founders at the negotiation table, this is my advice for dealing with CVCs.
CVCs understand startup negotiations, too
It may seem like you’re facing off against Goliath when trying to negotiate with CVCs, but the size and experience of their legal teams doesn’t give them an automatic advantage. Yes, CVCs are more used to preparing M&A and high-level contracts, but they should be able to change how they think when working with startups.
That means being able to work efficiently with a smaller team, write contracts in plain language and clearly break down requirements before anything is signed.
CVCs also shouldn’t go against the grain of the wider investment world; their size doesn’t allow them to operate outside of standard processes. So, if they present terms that would seem out of place in a traditional investor contract, founders can definitely call them out. Likewise, if a CVC wants to link the investment through a commercial deal, you can refuse, especially if there’s a possible conflict of interest.
On the flip side, founders need to be aware that CVCs may have regulatory hoops they need to jump through. There’s therefore a limit to how much they can negotiate on terms like compliance, money laundering and diversity. However, these clauses can actually benefit startups, because future investors will see that they’re growing with the mechanisms of a scaled business already in place.
CVCs want a strategic partnership, not just a financial one
When an angel investor or traditional VC backs a company, their primary interest is to get a good monetary return. CVCs, however, don’t want just financial outcomes, they want to tap into the innovation and disruption you bring. CVC investors want to facilitate your growth by giving you the resources and capabilities of a large corporation, transforming your ideas into real solutions.
CVCs sometimes solidify their strategic commitment to startups through a “warrant” clause. This clause rewards the CVC when growth is a direct consequence of its involvement, typically related to business generation. For example, if the CVC generates a certain amount in revenue due to its connections, the investor gets an additional stake or a higher discount in the next funding round. A “warrant” clause is similar to how sales teams are rewarded with commissions.
Because CVCs see your startup as a strategic partner, they’re straightforward about the ways they invest. They won’t tiptoe around what they can and can’t provide, or if there are red lines they need to include. For example, Telefónica can’t invest in tax havens, so we make sure to ask every founder where they’re incorporated in the first meeting.
But the pendulum swings both ways. Founders can ask CVCs about their portfolios, about how they operate as a strategic investor, the resources they provide to startups and how they’ve previously demonstrated their value as an investor.
CVCs’ terms should reflect their value in a mature market
The startup landscape has evolved significantly in the past decade, and startups now can select diverse investors from non-traditional backgrounds. CVCs have come to learn that their competitive advantage lies with the network, audience size, R&D tools and industry-specific knowledge they offer startups.
In the more mature markets, CVCs won’t be setting deal terms, like removing rights over IP developed by startups. Nor will they ask for direct influence on startups’ roadmaps. Essentially, anything that founders wouldn’t expect a traditional investor to demand, you shouldn’t expect from a CVC either. Smart CVCs need to be tailoring terms to facilitate greater trust in founders’ ability to drive success and establish the CVC role as the fuel along the way.
Both founders and investors should walk away from negotiations feeling confident. Especially at the moment, you should feel that you can still challenge investors’ terms and express your preferences. You shouldn’t hold back when negotiating terms that may initially seem strange to them.
CVCs are no stranger to back and forth when drafting a contract and will be happy to explain clauses and why they’re important for them. Ultimately, the objective for both parties is to build trust and secure a deal that is fair and successful.
Comment