All startups will make multiple capital raising rounds throughout their lives. Coinbase, a platform for selling, buying and storing crypto assets such as Bitcoin and Ethereum, has raised more than USD$500mm in six funding rounds. Among its more relevant investors are names as Digital Currency Group, Andreessen Horowitz, DFJ Growth, IVP and Tiger Global Management with whom it has had to negotiate terms and conditions for each capital raising event.

Each negotiation that Coinbase has conducted has been unique and considers aspects linked to the traditional negotiation matrix. But if we adapt this matrix to the world of Venture Capital this would be the result:

Strategic Negotiation – Power Negotation

    Name the terms       –     Final Negotiation

This matrix is mostly based on the potential synergies between the startup and the Venture Capital fund or Corporate VC (y-axis), which considers the value added by the relationship in the form of the three C’s:

1. Capital

a) Economic capital: Enough economic resources form the VC to support the startup throughout its growth cycle.
b) Commercial Capital: proof & concept, pilots, tech integration and commercial agreements.
c) Reputational capital: Investor’s track record and public image that can help strengthen confidence towards other investors, clients and partners.
d) Emotional Capital: Interpersonal connection that complements the motivation and background of the VC.

2. Cognition:

Sectorial, business, corporate governance, operational and technological expertise that add value and complement the startup’s knowledge.

3. Contacts:

Supporting the business development and capital raising of the startup.

In addition, it considers the urgency of the startup’s capital raising, together with the negotiating power (x-axis). Based on the combination of both axes in the last graphic, the results of the matrix are the following:

1. Power Negotiation

This is the ideal quadrant in the negotiation between a startup and a fund. There is a high synergy between the startup and the Venture Capital fund. In addition, the startup has no urgency in raising capital and therefore has ample negotiating power. Throughout the different rounds of capital raising, Coinbase and many other successful companies had negotiated within this quadrant.

2. Strategic Negotiation

This quadrant defines the strategic relationship between the startup and the VC fund, although it considers the entrepreneur’s urgency to raise capital. Usually this negotiation could impact the relationship between the parties and could result in a longer negotiation process, reaching the limit of the capital available by the startup. The investors can reflect deeply on whether they really want to invest in this startup.

3. Name the terms

When a startup has an urgency to raise capital and there are few synergies with investors, then the bargaining power of the entrepreneur is limited, and it goes to the extreme of having to accept terms and conditions in order to get the funds. Negotiation becomes a take-it-or-leave-it situation. A well-known example is the case of WeWork, which after a failed IPO attempt had to accept SoftBank’s terms to continue operating.

4. Financial Negotiation

Sometimes there are no synergies between the startup and the investor, nor is there a need for additional knowledge or capital by the startup; however, the investor has a high interest in participating in the investment to get solely a financial return. An example are those non-primary, typically first time, Venture Capital funds which are only looking to create track record on their first investments.

Most negotiations have catalysts that speed up the decision-making process and set the expectations for the final agreement. Some of these are:

Leverage: It will support the entrepreneur in getting quality Term Sheets and having constructive negotiations from a position of power
Traction: To have a good execution of the business showing positive operational and financial results
Runway: Have enough liquidity to face the growth of the company. A good capital structure favors this point
Competitive advantages: Having entry barriers and a disruptive technology. In addition, having good leadership, a proactive culture focused on results and a winning mentality will be a strong ally
Reputation: It takes a long time to build a good reputation and it is the most valuable of your assets
Negotiation commitment: How interested both parties are in the negotiation process, sharing information (openness), dedication of time and how much you are willing to give up. If you are not able to make a commitment, it is best to say no. Also, don’t over-commit yourself when it won’t be possible to deliver
Transparency: VC funds probably have more experience than the entrepreneur in negotiation processes. Be transparent and honest in your positions and mistakes, this will increase the confidence.
Trust: Degree of security you have in the counterpart to reach a compromise. Closeness and a good interpersonal relationship strengthen trust. Always prioritize and maximize trust.
Context: It could be a catalyst if you know how to take advantage of it, but it does not determine your negotiating power.

Some additional recommendations are:

1. Study and empathize with the counterpart: Build expectations according to the process of each investor
2. Prepare for negotiation: Think constructively and imagine creative solutions for the benefit of both parties
3. Listen, ask questions, read and understand the terms and conditions contained in the documents subject to negotiation: Terms negotiated today will have an effect tomorrow
4. Manage the negotiation process efficiently: Be efficient in reviewing documents and share your comments in a timely manner
5. Stay calm and never give up on negotiation: Negotiation is part of the business culture, don’t take it personally and exhaust all possibilities
6. Always be objective and flexible: look for win-win positions and long-term commitments
7. Don’t get too confident: negotiation can be slower and more complicated than expected
8. Negotiations take time, patience is a virtue
The growth process for startups is like fighting a war. Each capital raising round is a battle. Learning to negotiate by looking for mutual commitments and win-win relationships is the most important thing in each round.

«Know the enemy and know yourself; in a hundred battles you will never be in danger. When you don’t know the enemy, but you know yourself, your chances of winning or losing are equal. If you ignore the enemy and yourself, you are sure that in every battle you will be in danger«. Sun Tzu, The Art of War


Héctor Shibata, Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.

Ana Maury Aguilar, Investment analyst at ACV.

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