TL;DR: There should be none.

Sell your home

You want to sell your home.

So:

• You set a fair price
• To ensure you reach many potential buyers, you put your home up for sale on Funda
• You sell to the first buyer who pays the price

Because there are many potential buyers, each buyer has an incentive to (1) pay fair price – otherwise some else will, and (2) act fast – otherwise someone else will.

The potential buyers compete against each other instead of against you.

Sell your shares

You want to raise money.

In 95% of the cases I see: you ask 1 more or less random potential investor for a term sheet and a valuation.

What do you think will happen? (1) Will he lowball you? (3) Will he stack the deck by putting in favorable terms like anti-dilution and liquidation preference? (3) Will he take forever to decide?

You either accept his offer or go bankrupt.

You have zero negotiation power because you have no alternatives lined up.

A typical conversation

You: I am negotiating with an investor! Me: That’s great! How many other investors are you talking to? You: Euhm, none? Me: Then you are not negotiating. You will have to accept whatever is offered.

Sell your shares – revisited

Fortunately, this is easily fixed.

You want to raise money.

So:

• You prepare a term sheet, which includes a fair price
• You seek out 3-5 potential investors
• You sell to the first investor who pays the price

Because there are multiple potential investors, each investor has an incentive to (1) pay fair price – otherwise someone else will, and (2) act fast – otherwise someone else will.

The potential investors compete against each other instead of against you.

 

Thanks to Hans Westerhof and Chretien Herben.

Joachim Blazer is author of The #1 Guide to Startup Valuation. How to value your startup in 12 easy steps. For founders. For seed rounds and Series A. For equity and convertible debt.