“In general there are only two things that VCs really care about when making investments: economics and control.”
This sentence comes from Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist (see link to the book at the end of the post), one of the best books for understanding what actually matters when negotiating a VC investment.
Economics
Economics refers to the return the investor will get on the investment, whether through a token sale, a sale of the company, closing down the company, or an IPO. This also includes tax issues that impact returns, the valuation of the deal, token lockups, vesting, and many other negotiated points.
Control
Control refers to the mechanisms that allow the investor to influence or block certain decisions. This can include board seats, veto rights over key actions such as a sale of the company, related-party transactions between founders and the company, and similar governance rights.
Focus on what matters
Deals are complex. There are many decisions that need to be made, countless comments that can be raised, and very little time to get the deal done. When lawyers argue over issues or send comments, you want to make sure every point is actually tied to economics or control. You will quickly find that some comments are not really related to either of them. Sometimes this happens because some lawyers are trained to comment on every possible issue, and sometimes because raising additional points creates room to compromise later. In any case, our goal, as VCs and founders, is to get the deal over the finish line fast and efficiently, and not waste time on things that do not matter.
Summary
The gist is simple: if it is not related to economics or control, negotiating it is usually a waste of time. For every issue that comes up, ask yourself: Does this affect economics, or does it affect control?
Link to the book:
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Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist
