What can you do to protect your ownership from venture capitalists?

I think the comments above are very sound and wise but I will repeat some of them.

Before the VC's come knocking or you go knocking:

1. Decide what you really want your business to be. Lifestyle business, growth business, family business, grow and exit, etc.
2. Decide if you want an exit strategy within 5 or so years.
3. Is your business plan realistic from a revenue, growth, and expense standpoint. If its not realistic it will become your worst nightmare if you take outside investors.
4. Are you willing to give up some control on day/day operations and perhaps grow/sustain your business differently than what you imagined.
5. Can you live with perhaps not having/sustaining the culture you envisioned when you started the business.
6. What kind of business partner do you want? VC firms have different personalities and operating styles. Some are very actively involved and others little involved other than with the exception of regular update meetings. Others will have people on staff with you who will share decision making.
7. What kind of board do you want and need to make the business successful.
8. Are you accepting of the fact when you play with other people's money you are accountable in ways never envisioned. The best thing you can do is make plan month after month and sustain cash flow if at all possible. Goes back to deciding what kind of business you want.
9. Hire a good lawyer. The VC round of financing can be complex and perhaps covering areas you know little about. Make sure you understand the term sheet and operating agreements thoroughly.
10. Would you be satisfied growing the business more slowly rather than kick starting with a capital infusion? Depends on the type of business you want to have long term.

VC Firms:

1. As mentioned their motivation can often be quite different from each other. However, they are all in the business of making money. It's how they go about that that can be fun or excruciating for you.
2. Make sure they understand your business arena? Check with other comapanies they have in their portfolios.
3. Be a strong negotiator but realize if you want money you will likely have to compromise in some areas. Choose the battles wisely.
4. Get as much as you think you will need upfront so you won't have to go back to the well again. The more rounds you get the more diluted you become.
5. Have a good understanding of their expectations after the funding.
6. Be prepared to be held accountable for your plan and results.

Ways to maintain control:

1. Take as little capital as possible.
2. Meet plan and manage cash flow.
3. Take a partner you trust and have similar philosphies of running and growing a business.
4. Evaluate candidly how big a company you are capable of runnng and desire to have. Too often the founder reaches the limit fairly quickly and they get pushed out. If there is commond understanding it will drive the type of VC partner you pursue.
5. Have a strong operating agreement with no ambiguity.

Good Luck.

Taking VC money means taking on an important partner in your business. As with all partners, disagreements or tough decisions can lead to conflict.

Take enough rounds of VC money and you will eventually lose voting control of your board and/or your company. If that worries you, I would avoid taking VC money.

If you do take VC money, the best way I know of protecting your ownership is to build a great, fast-growing business. This mean fewer rounds and/or less VC money and less incentive for a VC to do something you do not like.

First of all, don't do like Adeo Ressi, founder of TheFunded.com admitted to doing and that is neglecting to read, in detail, the entire term sheet.

I can't begin to say how much I've learned from reading everything, over and over, on VentureHacks.com and all related links and following everyone from there on Twitter. I'm lucky to be based in San Francisco, so I go to a lot of events, network a lot with other startup founders/entrepreneurs, and ask a lot of questions and advice from those who've been there before me.

Next, get the best legal representation you can afford and make sure s/he has at least several years direct experience in corporate, M&A, and start-up deals. They will discount and defer fees, but be careful in what you agree to in writing. That goes back to rule #1-read *everything* in detail.

If you don't fully understand *anything*, keep asking questions until you are satisfied that you do understand and repeat it back to the investor/s, lawyers, whomever to get their confirmation that your understanding is correct.

Depending on how big your idea is and who invests in you and how many series, you can pretty much count on not being the largest holder of shares, but that doesn't necessarily mean you have to lose control of your company. And, there are exceptions to the rule, where the principals educated themselves ahead of taking any money and successfully held onto a majority of shares and control.

We encourage all of our clients to think carefully before going down the path of venture based funding. The safest way to protect your control of your business is to build it yourself. Evaluate carefully your need for the funds. Can you trade slower growth for more control or do you have opportunities where the only way to success is a capital infusion.

Select partnerships carefully, in this enviroment young companies are often tempted to jump at any investor with funds, but your choice can determine the eventual success or failure of the partnership. Remember it is a partnership so evaluate any potential VC as you would any potential business partner. Availability of funds should not be the only criteria to accept their offer.

Hi Roy: I've heard those horror stories too. At the same time that we've all heard the horror stories about VCs robbing entrepreneurs, we've all heard the stories about the entrepreneur that doesn't have the stamina, skill or experience to grow their business beyond $5 million or $10 million in sales. As you can imagine, there's a big difference between managing a company with 5 people and one managing 5,000. You need different people and experiences in managing the growth to and through these milestones.

I'm sure you've also heard the huge successes about how VCs played a role in the formation and maturation of many of the greatest brands and companies around. So as you'd expect in any business decision, there are pros and cons.

First of all, there are many more things you can do to avoid VC funding that there are to get VC funding. I'd estimate the ratio is something like 100:1; 100 startups try to get VC money versus the 1 that actually gets it. And there are probably another 1,000 startups that don't want, or don't try to get VC funding. And, that's perfectly OK.

The choice for you is to decide what you want: to own a little bit of something really big or own a lot of something small. It really is important to know your own limitations and interests and stick with them, instead of getting caught up in the desire to control everything and ride the horse into the future.

Getting VCs involved means that you're interested in growing your idea into a substantial business, and that takes trust, hard work and recognition that you need external help to maximize the business' potential. Hiring competent attorneys, financial advisors and the like can assist your negotiations, but at the end of the day, it's my experience that this has got to be a decision you want to make as opposed to a decision you have to make.

Use the experience to learn. Good luck,

Agreed, the best way is not to get in bed with them to begin with... ;)

Still, there are times when it makes sense to leverage their cash, so here are some things to think about.

- Be in the position of power. Make sure you are hitting your business plan, and if possible, be cash flow positive.
- Remember that everything is negotiable, but also understand that you can't win on everything, so pick your points and understand theirs and know where you can bend.
- Talk to some of their portfolio companies, understand where you fit and who you might benefit from associating with (ie, it isn't just about the cash as Kim points out).

Good luck!

The best way to defend your equity is to develop a predictable stream of revenue. The more predictable the revenue and cash flow, the more leverage you attain due to reduced investor risk.

If you need VC money to create revenue then your you're not likely to get professional investors.

How do you create predictable revenue? First, develop a clear understanding of your buyers and buying cycle lengths given deal size and risk. Seek to optimize your dealflow by building a sales pipeline that has mostly low to moderate risk deals with a moderate sales cycle length. 5-15% of your pipeline should consist of deals that are large and have longer-than-average sales cycles and higher risk, but don't try for high revenue growth solely from large and/or high-risk deals.

Lastly, don't expect buyers to flock to you unless you are believe that you are more lucky than good. As soon as you have a hot, new item someone else will copy it. Remember that your product or technology is not important, but your ability to explain its value to the buyer. Entrepreneurs who forget this end up with less predictable revenue streams and are forced to cede more equity to investors.

There's some really excellent advice in the posts above. one thing I'd add is to understand what your VCs want and how they think. Realistically they rarely want the same thing as the founder. To the VC it's an investment, to the founder it's their baby. So put yourself in their shoes (much as you would do with a customer)and understand their perspective. Also, you are important to them because you know how to make your company operate profitably. As long you continue to do that you are actually a factor in reducing their risks. The challenges begin if the results don't match the expectations. You will labour on because you love your company. They will become anxious because their investment is not performing.