Some Tips on Negotiating

* This material was developed by Google Gemini Pro 2.5 on June 19, 2025

On the Sociology of the Founding Team (Founder Archetypes)

This is about understanding your starting position—the unique strengths and weaknesses your origin story gives you in the eyes of an investor. Investors pattern-match. Knowing their perception of your “archetype” allows you to pre-empt their concerns and lean into your strengths.

Your background isn’t just a story; it’s a set of assumptions that investors will bring to the table. Your job is to understand those assumptions and use them to your advantage.

Here are three common archetypes that may help you understand negotiation dynamics from different viewpoints:

1. The First-Time Entrepreneur (e.g., The PhD or Engineer with a Breakthrough)

• Source of Leverage: The technology itself. It is likely novel, defensible, and the core reason for the investment. Your passion and deep domain expertise are infectious and a huge asset. You are a “clean slate,” free from the baggage of past ventures.
• Points of Investor Scrutiny (Your Weaknesses):
  • Commercial Acumen: They will doubt your ability to build a sales team, manage a budget, or run a board meeting.
  • Naivete: They will assume you don’t know what “market standard” terms are and may present an investor-friendly term sheet from the start.
  • Team Building: They will question your ability to recruit senior, experienced talent who won’t want to work for a first-time CEO.
• Negotiation Impact: Expect investors to push for more control to compensate for your inexperience. They will focus heavily on Board Composition (insisting on an independent board member they choose) and may add experienced advisors. Your leverage on the uniqueness of the tech can be used to push back on overly aggressive economic terms like Participating Preferred Stock.

2. The Corporate Spin-Off (e.g., The Team from a Fortune 500’s Water Division)

• Source of Leverage: De-risking. You likely have proven technology, a seasoned team that has worked together, and possibly even an existing pilot or customer relationship transferred from the parent company. You speak the language of business operations.
• Points of Investor Scrutiny (Your Weaknesses):
  • The Umbilical Cord (IP & Legal Entanglements): This is the single biggest risk. Investors will perform exhaustive diligence on the spin-out agreement. Are there any royalty payments back to the parent? Does the parent retain a license? Any “right of first refusal” if you sell? Any non-compete clauses? A messy separation can kill a deal instantly.
  • Pace & Culture: Can a team accustomed to a corporate budget and pace adapt to the lean, rapid-fire environment of a startup?
• Negotiation Impact: You can command a higher valuation because the tech and team risks are lower. However, you will have zero leverage on Representations & Warranties related to Intellectual Property. You must be able to make an ironclad guarantee that the IP is owned, free and clear, by the new entity. Any ambiguity here must be resolved with the parent company before you seek funding.

3. The University Technology Transfer (e.g., The Professor-Led Startup from a UW-Madison Lab)

• Source of Leverage: Deeply defensible, peer-reviewed science. The university’s brand and pipeline of PhD students can be a powerful asset. Often has access to non-dilutive grant funding, which investors love.
• Points of Investor Scrutiny (Your Weaknesses):
  • The Tech Transfer Office (TTO): The university is your permanent, and often demanding, partner. Investors will scrutinize the license agreement: What is the royalty rate? Are there milestone payments? Who controls patent prosecution? These TTO obligations are senior to the investors’ equity and can be a major drag.
  • Founder Commitment: Is the professor truly leaving the university to run this company, or is this a side project? Investors are funding committed founders, not hobbies.
  • Pragmatism vs. Perfection: Can the academic mindset, which seeks perfect understanding, pivot to the commercial mindset, which seeks a “good enough” product to sell?
• Negotiation Impact: Similar to the spin-off, the university license agreement must be largely settled before approaching VCs. You will have little leverage to change it once investors are at the table. Your leverage is in the strength of the foundational IP. You can use it to argue for a strong valuation, but you must be prepared to show a clear plan for bringing in commercial leadership to complement the scientific founder.

On Leverage for Specific Contract Clauses

1. Intellectual Property Representations & Warranties

• The Clause: You guarantee the company owns its IP.
• How Leverage Shapes It:
  • High Leverage (Multiple Term Sheets, Hot Space): You can negotiate to soften the guarantee. You can change “The Company owns all IP” to “To the Company’s best knowledge, the Company owns all IP…” This protects you from unknown issues. You can also negotiate to cap your personal liability for an IP breach at a very low amount (e.g., $1), making it a corporate problem, not a personal one.
  • Low Leverage (Messy IP from a University/Corporate Spin-off): You have no room to negotiate here. The investor will demand an absolute, unqualified guarantee. They see this as a fundamental risk of the deal, and they are making you “carry the paper” on that risk.

2. Founder Vesting

• The Clause: Your stock is subject to vesting (typically 4 years with a 1-year cliff).
• How Leverage Shapes It:
  • High Leverage (Serial Entrepreneur, or you’ve been working on this for 2+ years full-time): You have significant leverage to ask for vesting credit. “I’ve been working on this for two years, so I want 50% of my equity vested at closing.” You can also negotiate for acceleration of vesting upon a change of control (i.e., if the company is sold, your vesting speeds up), ensuring you’re rewarded in a sale.
  • Low Leverage (First-time founder, idea-stage company): You will get the standard 4-year vest with a 1-year cliff starting on the day of closing. This is considered standard “sweat equity” protection for the investor. There is very little room to negotiate this.

3. Exclusivity Period (“No-Shop”)

• The Clause: A binding provision stating you won’t solicit other offers while the investor does diligence.
• How Leverage Shapes It:
  • High Leverage (You have other verbal offers or significant inbound interest): This is where you can play hardball. You can say, “I can’t agree to a 45-day no-shop when I have other firms wanting to meet next week. I can give you 21 days, and we need to move fast.” A short exclusivity period signals strength and forces the investor to act decisively.
  • Low Leverage (This is your only offer): You will likely have to agree to the investor’s requested period (30-45 days). Your goal here is not to shorten the period but to get a strong “moral commitment” from the investor that they will not drag their feet during diligence. Get a weekly check-in call on the calendar as part of the deal.