Venture capital · Fundraising

Who Starts the Bidding VCs or Entrepreneurs?

Tim Scott

June 25th, 2014

We are going into a second meeting with a VC for seed funding.  In our pitch we have stated the desired raise, and we have expressed a expectation of a convertible note.


Are they likely to ask us to start the bidding by stating our desired terms (cap, interest, discount, etc) or will they make the first offer?


If they do ask us to start, should we try hard to punt it back to them, or should we have high offer ready, expecting a lower counter?


It is possible to blow it by starting the bidding too high?
More than 65% of new companies fail because they lack funding. In this course, you’ll learn common fundraising mistakes, how to nail an elevator pitch, how to craft a killer pitch deck, where to source investments from, and all about term sheets and convertible notes.

Steve Douty CEO of Nexo, Inc.

June 25th, 2014

I would agree with Duane.

What's most important is to get the cash in the bank. So the focus should be on the next set of key milestones and how much cash it will take to get you there.

I think your opening position should be:
  • 20% discount - but be willing to go to, say, 33% depending on whether there is a cap and how the cap compares to the amount raised.
  • No cap - don't even bring it up - but they might. That will be a low proxy for your Series A valuation.
  • 5-6% interest on the note is usually fine.
  • Propose a two-year note - one year often isn't long enough. You end up going out and having to ask the noteholders to extend by another year. They'll almost always do it, but it's easier to put it in the first set of terms.
  • Don't get greedy with the valuation (i.e., cap) - but don't be shy about counter-offering.
  • Don't negotiate until you have two or more interested parties.
  • Most of the time, if you have a note in place with one relatively solid investor/angel, the rest will follow suit.
Hope this helps.

Duane Nickull Chief Marketing Officer, Co-Founder at Cheddar Labs

June 25th, 2014

This is like asking "What direction should I walk?".  There are so many factors involved and in the end, it comes down to what is acceptable by you.  

I usually start by stating the money required to get the company from it's current status to the next stage.  The amount is basically non-negotiable since financing less than the required amount will result in a fail.  The number that will be negotiable is the percentage of the company they will want.


To address this, it helps to have a point of reference, such as a similar company receiving an evaluation.  you can use that to help gauge where your company is.


That would be a good place to start negotiating from.  The VC group will have to decide from there is they want to invest or not.   Once again, there is no point in raising only a portion of the funding required.

Kate Hiscox

June 25th, 2014

What Duane said. Its the common sense approach. You need what you need. You'll have to support the basis for your numbers but at the end of the day, if you need $500,000 to reach your next stage and they want to throw in $200,000, its up to them to convince why that is all you need.

Jessica Alter Entrepreneur & Advisor

June 25th, 2014

It sounds like this is a  convertible note (since you're talking cap, rate and discount)? If so, there is a fairly small range of what is acceptable for early stage startups raising a note
I would definitely not get hung up on rate and discount - there are industry standards for those - usually the discount is about 20%. 
As per Jimmy's advice, you should ask around as to what deals got done recently - in general and by the people you're pitching and know the ranges on the caps. You'll quickly see the zone.

Rob G

June 25th, 2014

in my experience they will provide a terms sheet to you and they will ask you for what you think your valuation is. If they think it's too high they will push back or walk. yes, it is possible to blow it by setting your expectations too high.  However, remember the adage "the only thing a VC hates more than a bad investment is missing out on a good one" - if you have a compelling team, product, traction, etc. and you are realistic about terms and performance then you will be fine.  understand what makes them tick - they want you to be successful.  Yes, they are in this to make money for themselves and for their investors, but that doesn't happen if you are beat to a pulp and de-motivated.   There needs to be a fine line between terms that make sure your team has a sense of urgency and commitment and big rewards for big performance, but not so draconian and controlling that they dread coming to work.  There are certainly deals that get done where the terms are too good for the investors and everyone looses.  
Given that you are looking at a convertible note then valuation is somewhat a moot point and their terms will focus more on discount and control-type provisions such as anti-dilution, liquidation preferences, board seat, etc. but i have not actually done a convertible note.  You should be able to get a good feel for what valuation other companies like your's (your stage, team, location, etc.) are getting - it is surprisingly "standard".  I don't think you will have to push to get them to lead the discussion on terms.  If this is a seed-stage VC they will understand the need to have terms that are palatable for the follow-on investors so they shouldn't be too heavy handed or they won't be able to attract A round investors.  That being said they won't be terms that are easy to swallow either. Understand that with a convertible note you are on a strict time clock - if the conversion date arrives and you don't have your follow-on deal done the discussions to renegotiate the terms of your note will make you sweat.  good luck. 

Tim Scott

June 25th, 2014

Perhaps I was not 100% clear. The amount we are asking for is not at issue. It’s true, we need what we need. The question is how to start the bidding on the terms of the deal, cap, rate, discount, etc.

Jimmy Jacobson Full Stack Developer and Cofounder at Wedgies.com

June 25th, 2014

Find out the terms they like to invest at. They should be pretty open with you about that.

shimon elkabetz Investment Partner at Magna Capital Partners

June 25th, 2014

Hi Tim as investor in general my preference is to have cap and a time limit, the main reason relates to the speed that companies are progressing and their value can change dramatically. the key to negotiation is how strong you are and attractive to investors, than you can dictate the rules. All the best

Phil Strazzulla

June 26th, 2014

It would be great if people who have raised money, or know others who have raised angel rounds recently, could comment on what's "market" these days.  Clearly, depends a lot on the idea and team.  I've been hearing 6% dividend, 20% discount, $4 mm cap....mostly from classmates at HBS who are trying to raise seed rounds.

This blog post I wrote a few years ago explains the convertible note structure and has an excel model too, in case anyone is confused about how this works: http://philstrazzulla.com/2010/06/09/plain-vanilla-angel-structure/


Steve Douty CEO of Nexo, Inc.

June 26th, 2014

I completed a raise of $2M in angel and boutique VC money via convertible note about three months ago.

The "market" is pretty subjective - depends a lot on how far along the product is, how much of the core team is in place, and also the amount being raised via note vs. how much anticipated in the first actual round.

Interest on the note is typically in the 5-6% range. Not a factor, really, but if you take a year to convert, it's additional dilution.

Discount for us was 20%, but it could go to 25%. Higher than that, and you could get sideways when the notes convert.

The cap is all about the potential for the business and is very much driven by the amount you absolutely must raise via the notes.  If you need $2M and the conversion cap is $3M pre-money, then you have a problem. On the other hand, if you need $1M and the cap is $10M pre-money, you won't get savvy investors or you'll lose some cred.

We ended up raising $2M with a $6M pre-money cap (the latter of which was added by a VC). The impact of the cap isn't as simple as it sounds, so check out Phil's spreadsheet (above). The concept of a set figure for a cap is meaningless outside of the context of the business - so I would start with how much you need first, and then let the cap be market-driven.