Ask A VC: How do you negotiate with a VC on valuation?

Today is the first installment of venture capitalist David Pakman’s new column for us: Ask A VC! The Venrock partner will answer questions from readers on a monthly basis. For our first installment, he takes on the always-tricky subject of valuation. Specifically: Can you negotiate your valuation with a VC? And if so, how? 

So, you have received a term sheet from a VC to fund your financing round. But you aren’t comfortable with the valuation. So, how do you negotiate? Here are a few pointers:

1) The first is to understand the VC firm’s philosophy on price and term sheets. Some VCs are flexible on price but will introduce other terms to essentially manipulate the effective price (such as participating preferred, the size of the option pool, anti-dilution provisions, etc.) Other VCs, such as Venrock, prefer to deliver vanilla term sheets but have a clear agreement on price. In other words, because valuation is only one term in a term sheet, you first need to be clear what you are negotiating. Ask the VC what their views on price are.

2) The most effective way to negotiate price (and other terms in a term sheet) is to have a competing offer. Receiving multiple term sheets gives you a clearer signal on the market’s view of what your company is worth. You can most quickly move price by telling a VC, “I want to work with you and your firm, but our term sheet from this other firm is offering us a price of x.” The more term sheets you have, the more pressure you are able to place on all interested VCs.

3) Some caution is prudent here. In my view, it should never be your goal to maximize price. Picking the right partner and the right firm who truly understand your company and mission and have lots of experience building successful companies like yours is far more important than squeezing every last penny out of the market. Also, be careful what you wish for. The higher the price, the bigger expectation you are setting for your exit. Be reasonable about what you are most likely to accomplish and pick a partner worthy enough to join you on your entrepreneurial journey.

Now it’s your turn to Ask a VC …

Got a question for David? Let us know!