Thursday, January 12, 2023

Venture Capital Trading Issues


Venture Capital Trading Issues

Venture Capital Trading Issues

Valuation. Valuation is one of the most prominent trading topics. The valuation is the price of the company in which the venture capitalist invests. The valuation determines what percentage of the company the investor is buying for their capital.

Investment Moment. Often these installments are only made when pre-set milestones are met.

Acquisition of shares of the founders. Like equity, investors often prefer shares to be delivered to company founders and key employees in installments. This is known as vesting.

Modification of the Management Team. Some investors insist that additional or replacement management employees be hired after their investment. This gives investors additional assurance that the company will execute on its business model. An important issue to negotiate regarding the change in the management team is the number of shares or options that will be issued to the new members of the management team, as this will dilute the founders' holdings.

Labor agreements with Key Founders. Venture capitalists typically don't want companies to have employment agreements that limit the circumstances under which employees can be fired and/or set compensation and benefit levels that are too high. Other key employment contract issues to be negotiated with venture capitalists include restrictions on post-employment activities and severance pay for employees upon termination.

Company Property Rights. If the company has a major product with intellectual property (IP), investors will want to make sure that the company, and not an employee of the company, owns the intellectual property. Additionally, investors will want to ensure that new inventions are assigned to the company. To this end, investors may negotiate that all employees must sign Confidentiality and Invention Assignment Agreements.

Escape strategy. Investors are very focused on how they will "cash out" their investment. In this sense, they will negotiate on registration rights (both at sight and on the back); participation rights in any sale of shares by the founders (co-sale rights); and possibly a right to force the company to redeem its shares under certain conditions.

Blocking Rights. Venture capitalists may require a lock-in period at the term sheet stage. The "lock-in period" is typically a 30-60 day period in which investors have the exclusive right, but not the obligation, to make the investment. Investors typically carry out due diligence during this time without fear that other investors will jump ahead of their opportunity to invest in the company.

Each of these issues is critical when raising venture capital, as the result can significantly affect the success of the company and the wealth potential of the company's founders and management team. Because venture capitalists are very knowledgeable about these issues and have a great deal of skill in negotiating them, companies that are raising venture capital should look for advisors who also have this experience and knowledge.