Most funded Founders get to a point where their current deal sucks.
It starts when we take (and keep) salaries well below market, then it extends as our position in the cap table gets crushed, and explodes when we're in Year 8 and nothing has improved.
We now run a company that isn't good for us — and probably not good for investors either. So how do we propose a change in our deal when so much time has elapsed?
Whatever we think our new terms should be, whether it's an increase in base salary, a cut of the profits, or an increase in our stock position, what matters is how we propose it. There's a specific path we need to take to insure we stand the best chance of a reset.
Make it a Binary Decision for Board Members
When it comes time to present our "New Deal" we have to go all in. We can't present it as "I'd kinda sorta like things to be different..." because if the Board thinks this is simply a nice to have, they won't act.
Instead, we have to make it a totally binary decision — "Either I get this, or I walk." That doesn't mean we have to be a jerk about it, and we certainly don't need to use those exact words, but that absolutely needs to be the takeaway. If we don't make the decision binary and infer actual consequences, there's no real incentive for the Board to react.
Conversely, if we lay down the hammer and make it clear that we need this new deal or we won't be around any longer, the Board is forced to make a move. What we need is a firm response in a short period of time, not a long, protracted discussion that continues to leave us in limbo.
Start with the Friendlies
Every Board is made up of what I call "Friendlies." Those are the people on the Board who are more likely to support our cause because they generally support us. We want to open the conversation with them first, in a private, one-on-one setting.
There we will explain our situation, how the current deal is no longer working for us, and how we propose to change it. The nice thing about starting with a “friendly” is that it gives us an external view of how our proposal might be received. Think of it like a scrimmage for the big game.
More importantly, we want to start stacking allies on the Board so that as we approach each consecutive Board member, we can build on the support of the previous member. It's a whole lot easier to convince our 4th Board member to support us when there are 3 of the 5 votes already in our favor.
Don't Propose It During Board Meetings
By the time we would present this officially at a Board meeting, we should have long since resolved the major issues. No one in the Board meeting should be unaware that this will be proposed because we should have been doing our legwork with each Board member ahead of time.
The last thing we want is one or two Board members who are hearing this for the first time and feel ambushed by the proposal. There's often at least one person who is absolutely not on board or at least has some serious issues, but by this point, they should be outvoted by the majority anyway.
None of this guarantees our outcome, but the process helps smooth out what could be a life-changing outcome for us as the incumbent CEO. We want the Board to know we approached this honestly and with as much tact as possible. Even if they don't support us, it won't be because of our approach. And if they do support us, it'll be because we made the process 100x easier.
7 Helpful Tips for Negotiating a New Deal
Negotiating a new deal with the board of advisors of your startup company can be a challenging task, but there are several steps you can take to increase your chances of success:
Prepare thoroughly: Gather all the information you will need to support your case for a new deal, such as financial projections, market research, and data on the performance of similar companies in your industry. Even if you don't end up using some of the information during the proposal, being over-prepared is always a testament in your favor.
Communicate your value: Clearly articulate the value that you (and your team) bring to the company, and demonstrate how this value will increase with the new deal you are proposing. Emphasize any unique skills or experience that you have that are particularly relevant to the success of the company.
Be flexible: Be willing to compromise and find creative solutions that meet the needs of all parties. Be prepared to listen to the concerns of the board of advisors and address them in your proposal.
Use evidence: Use data and research to support your case, and show how the new deal will help the company achieve its goals. Show how the new deal will help to increase revenue, reduce costs, or improve efficiency. Venture capitalists on your board will appreciate the forward thinking and plan of commitment.
Network with others: Leverage your personal and professional network to gather information about similar deals in your industry, and use this information to inform your proposal. This is especially important for a company's growth in the early stages while still looking to raise money.
Be confident and professional: Show the board of advisors that you are a professional and that you have done your homework. Be confident in your proposal, but also be open to feedback and willing to make revisions as needed.
Timing is key: try to bring the deal up when the company is doing well, or some recent positive news happened.
Be Brave!
When it comes down to it, just don't be afraid to ask!
Asking for a new deal is a lot less scary in real life than it is in your head, so try not to let anticipation or imagination get the best of you. Focus on hammering out the terms you want (and need) from a new deal, and then presenting those terms in a factual way — a way that lets the discussion be about the reality of the situation rather than about trumped-up conflicts and egos.
You have the board seats filled for a reason, to make sure your executive team keeps the company's growth and best interest in mind. If you are aligned on that same front, the board members will most likely agree that the effort put out should be recognized, but there are always other variables to consider, especially in an early-stage company.
Summary
The main takeaway here is to make sure you're armed with data. Re-negotiating your deal comes down to one thing: leverage. If you can't prove the value you've provided to the company, you don't have any leverage in getting a better deal. So, if you want an improved pay package, use real numbers to show what your contributions are worth (assuming that there's a case for that sort of improvement). If you don't have any hard statistics, we'd advise that you take some time to gather some — and then talk to your board about a new deal.
Ultimately, whether you get a new deal or not depends on your board's perspective. Although it's key to have a good relationship with your board and have them trust you, they hold the power and can say yes or no to your requests. However, if you negotiate in good faith, they may feel more comfortable making a change that's in the company's best interest.
Remember, negotiating is a two-way conversation, and the key is to find a mutually beneficial solution that meets the needs of all parties involved. And may the odds be ever in your favor!
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In Case You Missed It
How Much to Pay Yourself. As a Founder, how do you determine how much to pay yourself? How much is too much or too little? We’re breaking down the long-debated issue of Founder compensation to help you find the right balance.
My Startup is Worth Millions. Why am I Broke? It's not uncommon for Founders to have all of their net worth tied up in their company without a real dollar to show for it. Our startup might be worth millions on paper, but is there a way to turn it into real money?
How Do I Get More Equity Back? Giving equity away is easy. Getting it back is super hard. So while we can get some stock back into our coffers, we have to focus more on how quickly we give it away than how we get it back.
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