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How does a bootstrapped venture prepare for negotiations with Goliath?

My team and I have bootstrapped our way through a beta test since the start of the year (i.e. we've spent a low 5 figure amount). The results are limited but very strong, and they've attracted the interest of a Fortune 500 company that's considering giving us our full raise (a high 6 figure amount). We keep hearing how we need to be careful about not being taken to the cleaners, but what exactly should we be on the lookout for? There's an NDA in place but nothing outside of that.

Other related questions:
- Should we offer both note and equity options, or just stick with one?
- Can we ask to be offered more money in the future if we reach certain performance milestones?
- What can we expect out of due diligence outside of showing them any legal documents? How can they verify our existing revenue streams?


19 Replies

Chicke Fitzgerald
1
0
Chicke Fitzgerald Entrepreneur • Advisor
Game Changing Strategist, Advisor & Technologist | Board Candidate | Zigging where others Zag
First, congratulations! That is great to hear.

In the first meeting I would focus on the "why" and the "what" versus the "how". It is certainly ok to discuss investment options (convertible debt versus equity), but you should not be pushed into a position where you have to make a decision without proper counsel (unless you have an attorney with you on the team).

I would absolutely talk about milestones and feel them out for their desire to increase their investment over time once you reach those milestones.

I would spend time organizing your due diligence files. It is a good discipline anyway, as you will find that there were things that you should have done, but perhaps handled verbally, such as agreements with employees or for sweat equity. There are several online platforms just for that, or you could just use a tool like Basecamp that allows secure access to documents, plus it organizes conversations and questions. You should separate your documents as follows: 1) Accounting
  • Backup of your quickbooks or other accounting platform
  • P&L and Balance Sheet for whatever period of time you have been operating

2) Company
  • Assets
  • Company Strategy
  • Corporate Status, including cap table and any unit holder agreements
  • Formation (Operating Agreement, Written Actions)
  • Related Party Transactions, including loans or leases
  • Technology (Data Model, Business and Functional Requirements if your product is tech oriented, plus product road map)
  • Employee, Manager and Consultant Agreements and Bios
  • Financial Model
  • Insurance info
  • Patent filing (for tech)
  • Registrations
  • Strategic Agreements/Supplier Contracts
I've seen this movie before, so if you need help and encouragement, don't hesitate to reach out.





Greg Gerik
0
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Greg Gerik Entrepreneur • Advisor
Growth & Revenue Marketing, Product Marketing, Data Fusion, Speaker
Agree with the previous comments but would add:
  • I have seen brokers/consultants work well for new or inexperienced groups to help navigate the waters. They are particularly helpful with the Fortune 500 because sometimes their corporate representative may not know which questions to ask. Companies will vet the legal, financials, etc. but not always the use cases and customer applications fully. Another advantage is you get someone that can polish the funding pitch / vision deck. You never want to give the impression you are only talking to just one party. The more potential for other investments, the better. Especially target their competitors in the market.
  • Savvy investors will also comb through any marketing materials looking for false statements, overstatements/claims, etc. Additionally, they will want to engage with a sample of your current customers, not just review their contracts. Because this is highly visible, it's usually one of the last things done before a deal is finalized.
If you have any questions, let me know!
Jonathon OBryan
0
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Jonathon OBryan Entrepreneur
Founder of The SmartSheet
I have a question, want to send me some info. on your company and yourself, as I need this sort of representation, myself... Have attorney's and whatnot, but need a more hands on approach, as I have many other tasks to focus on... Jonathon -
Lorraine Wheeler
0
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President at Redstoke, LLC
Congratulations!

With any investor, you need to consider how that investor's involvement will affect the future strategic direction of the company. This is particularly true if it is a corporate investor that wants to do the entire raise.

If you can manage to attract a second investor, it will put you in a better negotiating position.

You can ask for anything you want. As Chicke mentioned, the best strategy at first is to listen and make sure you understand why they want to invest and what they hope to get out of the investment.

The due diligence process can be time consuming. If you need to raise money, then getting all your information in order is necessary. Since you mention existing revenue streams, I assume it is a possibility to continue bootstrapping albeit at a slower rate. If this is the case, consider the cost of the distraction and make sure the raise and opportunity is sufficient.

Good luck!


Martin Omansky
0
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Martin Omansky Entrepreneur
Independent Venture Capital & Private Equity Professional
(1) if the goatherd is an operating company that wants to produce and or market your product, they will probably ask less in equity than a financial investor; (2) I wouldn't bother with trying to figure out what kind of security or note would be appropriate - the Goliath will determine it anyway, and you need to be prepared to evaluate any implications; (3) the due diligence process can be very thorough and a pain in the butt, but the law says you must present full disclosure AND the Goliath can do any other lawful thing to evaluate the investment opportunity. Best advice in two parts: (a) get a very smart experienced lawyer to help with negotiations; (2) view this opportunity as just one of many; take the money and don't try to get the last nickel on the table. Many other things will come to those who are creative. Sent from my iPhone
Maxine Pierson
1
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Maxine Pierson Advisor
INTERIM CEO, EXECUTIVE DIRECTOR/ VP Investor
You have to decide right now what do YOU want---write it down- go to the meeting - listen- then hand them your proposal- then walk---YOU choose they do not- have faith in YOU
Rob Gropper
2
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Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
A. do everything you can to find at least 1 additional interested party - competition/options is your friend.

A.1 Ask goliath at the first meeting if they have every invested in/acquired a startup like yours before. If so ask if you can talk to them - go talk to the CEOs.

B. At some point you will likely need to have a lawyer involved on your end. As expensive as that is, i recommend bringing them in right from the start for the following reasons (and i am far from a fan of attorney's) - also make sure this attorney has experience in private offerings and M&A and learn quickly how to manage attorneys : 1. to let goliath know that you have at least a second set of professional eyeballs on the process, 2. insulate the CEO from the early parts of the process (if you've ever purchased a car from a dealer you know how this game is played), 3. keep goliath from overstepping, 4. if you can find an attorney who has experience with this F500 that could give you added value.

C. the fist item on the agenda for the first meeting needs to be a clear and agreed understanding of how they see the process: who will be involved, how is the final decision made, who makes it, does it require BOD approval or CEO approval or ??. lay it out on the whiteboard or put it in an email, but get agreement on this early and confirm as you go along. Invariably some other step will pop up or get skipped, but you are running blind if you don't know exactly how they plan to do things internally.

D. As soon as that first meeting is over start building a plan for how members of your team build relationships with as many decision makers as possible and at least 1 or 2 'champions' - the people at goliath corp. who really want to see you succeed. A champion is very important, they are your eyes and ears inside. among other things, see if you can identify other startups they have purchased and/or ones they tried to purchase or invest in and failed. go talk to those CEOs too.

E. get a clear understanding of why they want to partner with you? this is key as it helps you understand your leverage.

F. too many additional details to list here, but in general don't ask the important questions just once and don't accept just one answer from just one source. Get answers from different sources all along the process. For example, if the point person on their end is below the C suite (for a 6 figure deal it likely will be) and when you ask (and you should) "will this decision require ____ approval" (CEO or BOD or other goes in the blank) and this point persona says "no" then be sure that others on your team ask other execs at goliath the same question throughout the process and compare notes. It is quite common for a director or GM or VP to claim they or their boss has the singing authority when it turns out they don't.
If you have someone on your team who has experience selling large $$ deals to F500 companies they should be able to help you navigate.
Rob Gropper
3
0
Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
i would NOT 'hand them a proposal'. at the first meeting or 2 (or how ever many it takes) ask lots of questions (as noted above) and then shut up and listen. You have 2 ears and 1 mouth - use them proportionally. You need to understand what they want and why. They have been through this many times and you, it appears, have not. It is certainly preferred to let them make the first offer. You can always counter offer. They will likely ask what you want and you should be prepared to discuss the high-level basics ("we think we need about $800,000-$900,000 to achieve x and y and z over the next xx months"), but again, in general I would do my best to redirect the conversation until A) you clearly understand what they want and WHY and B) get an idea of the kind of deal they are considering. I also would not offer any due diligence paperwork until you have agreed on the terms of the deal - due diligence is simply to confirm that things are as you say they are. It would be a mistake to offer DD materials before you have a signed letter of intent.
Chicke Fitzgerald
0
0
Chicke Fitzgerald Entrepreneur • Advisor
Game Changing Strategist, Advisor & Technologist | Board Candidate | Zigging where others Zag
Agree with Rob totally. But I would still get your due diligence site organized. You will then see what you are missing and when the time is right, you can make the due diligence a breeze, which will be a feather in your cap.
Jennifer Ernst
1
0
Jennifer Ernst Entrepreneur • Advisor
Marketing | Business Development for early-stage, high-growth tech
All good advice. I've done multiple 7-figure deals with Fortune 500 companies that did not involve any equity. Sometimes it's about distribution rights, access to founders' market knowledge. Find out where the money is coming from (whose budget) and ask a lot of questions to understand what they want out of the relationship.
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