Valuation discussions

Valuation is generally one of the most complicated topics to agree upon between VCs and founders, in particular in the less mature Venture markets.

Valuation discussions tend to be quite harsh and often contribute to create a bad relationship from the very start between parties (VCs and founding team) that are supposed to work together for several years. It is not uncommon that negative personal dynamics in the course of such discussions leads the parts to pull out of a transaction already approved.

In my opinion it is important to start looking at this issue with different eyes and interiorize the fact that the Venture Game isn’t a zero sum one.  When an entrepreneurs sells a company and gets out to do something else or retires, it’s understandable that getting the best possible price ranks very high on his priority list. If the buyer ends up loosing his shirts its unfortunate but not a terrible thing for the selling shareholders and entrepreneur. On the opposite a Venture Capital deal isn’t an exit transaction but the beginning of a 5-7 year journey. Maximising one own payout at the expenses of other fellow shareholders isn’t sound and leads to conflicts and problems and ultimately ends up harming the company as a whole.

A deal should be considered a good one when:

a) if all goes well everybody gets rich enough not to have to complain about the other’s payouts.
b) who joins the party at later stage where risk is (supposedly) substantially lower that in earlier stages, trades in a lower upside (higher valuation) for more security (liquidation preferences in case things do not go that well)
c) contributors to company’s success in the different phases are rewarded in a reasonably balanced way perceived generally “fair” by all constituencies (e.g. nobody would invest in a company where “angels” or friends and family hold majority stakes as they leveraged their negotiating power in early phases).
d) there is (generally) a diffused “perception” of the fairness of the respective payouts and nobody is frustrated (explicitly or implicitly). It is important that founder in particular remain focused on creating value for the company rather than improving his own payout at the expense of others.

Of course tensions are sometimes unavoidable but its important that they remain confined and that people keep treating each other in a civilized way. If this does not happen the company will suffer and eventually everybody loose.