| When companies enter into negotiations with venture | | | | restrictions on post-employment activities and |
| capital firms, there are several issues which need to | | | | employee severance payments on termination. |
| be defined and agreed upon. This article describes the | | | | Company Proprietary Rights. If the company has an |
| key issues. | | | | important product with intellectual property (IP), |
| Valuation. Valuation is the most prominent negotiating | | | | investors will want to ensure that the company, and |
| issues. Valuation is the price of the company in which | | | | not a company employee, owns the IP. In addition, |
| the venture capitalist invests. Valuation determines | | | | investors will want to ensure that new inventions be |
| what percent of the company the investor is buying | | | | assigned to the company. To this end, investors may |
| for their capital. | | | | negotiate that all employees must sign Confidentiality |
| Timing of the Investment. Many investors will commit | | | | and Inventions Assignment Agreements. |
| a large amount of capital, but will contribute that | | | | Exit Strategy. Investors are very focused on how |
| capital to the companies in installments. Often, these | | | | they will "cash out" of their investment. In this |
| installments are only made when pre-designated | | | | regard, they will negotiate regarding registration rights |
| milestones are met. | | | | (both demand and piggyback); rights to participate in |
| Vesting of Founders' Stock. Like capital, investors | | | | any sale of stock by the founders (co-sale rights); |
| often prefer that stock is given to company | | | | and possibly a right to force the company to redeem |
| founders and key employees in installments. This is | | | | their stock under certain conditions. |
| known as vesting. | | | | Lock-Up Rights. Venture capitalists may require a |
| Modifying the Management Team. Some investors | | | | lock-up period at the term sheet stage. The "lock-up |
| insist that additional or substitute management | | | | period" is typically a 30-60 day period where the |
| employees be hired subsequent to their investment. | | | | investors have the exclusive right, but not the |
| This gives investors additional security that the | | | | obligation, to make the investment. Investors typically |
| company will execute on its business model. An | | | | conduct due diligence during this time without fear |
| important issue to negotiate with regards to | | | | that other investors will pre-empt their opportunity to |
| modifying the management team is the amount of | | | | invest in the company. |
| stock or options that will be issued to new | | | | Each of these issues are critical when raising venture |
| management team members, as this will dilute the | | | | capital, since the outcome can significantly impact the |
| holdings of the founders. | | | | success of the venture and the wealth potential of |
| Employment Agreements with Key Founders. | | | | the company founders and management team. |
| Venture capitalists typically do not want companies | | | | Because venture capitalists are very knowledgeable |
| to have employment agreements that limit the | | | | regarding these issues, and have great skill in |
| circumstances under which employees can be fired | | | | negotiating on them, companies who are raising |
| and/or set compensation and benefits levels that are | | | | venture capital should seek advisors who also have |
| too high. Other key employment agreement issues to | | | | this experience and expertise. |
| be negotiated with venture capitalists include | | | | |