If the global economic forecasts are uncertain, fundraising is only the first half of the action for new startups. Venture capital firms that continue to invest in new companies often demand more aggressive conditions to reduce their risk. Term sheets from reputable venture capital firms probably won’t be downright predatory, but during a recession, worst-matter scenarios are more likely to occur and founders are more likely to pay the price. By carefully modeling the capitalization table and financial modeling, you can avoid giving up more equity than you would otherwise need.

As a co-founder of a global venture capital company that has funded more than 50 startups, I have repeatedly confronted founders like you. I can tell you that VCS want you to be successful because you are so successful. But a sluggish economy makes everyone a little tighter and more risk-averse, which means that you can expect your investment to come with additional conditions that you wouldn’t necessarily see in boom times.

Valuation makes a lot of headlines, but the preferred stocks—the preferred stocks that investors receive – are the part of trading that can really lure them into a worse deal than they intended. Pricing for these conditions can be difficult, because many of them become relevant only in certain circumstances. Dilution protection, for example, takes place exclusively in a downward cycle, which may seem like a relatively low-risk concession in a good economy. However, in a volatile environment, this can be the difference between life and passed away for your business.

The most accurate way to evaluate conditional terms is to run a simulation of potential outcomes in your financial model and calculate the impact of the proposed terms on your capitalization table and then average those outcomes over many iterations. However, this may require expensive specialized software and extensive statistical expertise, which you may not have.

A much simpler, but still very reliable option is to conduct a scenario analysis with your capitalization table and financial modeling. Scenario analysis involves analyzing different degrees of financial results (usually low, medium and high), rather than performing a dynamic simulation that runs through hundreds of possible outcomes.

A comprehensive overview of how to best evaluate preferential conditions is beyond the scope of this article, but I propose a roadmap on how to address some of the most common and consistent conditions. I will also show you how to evaluate them accurately enough to avoid unintentionally giving away too much of your company.

Position yourself for negotiations

Before you sit down at the table, do some homework: make sure that your startup’s finances are in order, make sure that you understand the dilution, make sure that your equity is distributed appropriately, and that your financial model is in place.

These steps will prepare you to estimate the valuation of your company and create your capitalization table so that you can model the conditions proposed by your investors.

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