Tactics you could use to negotiate a great venture capital/equity financing deal for your startup as a black founder

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Last updated on July 14th, 2021 at 12:19 pm

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The first thing you should know is that the venture capital fund industry is predominantly white and male. Therefore, if you are black, talented and you have a great tech business idea, you will struggle to get an investor. The first tactic most black founders in Africa do is partner with white male founders. That’s just the reality.

According to Transparent Collective, an NGO, of the estimated $136.5 billion in venture capital funding that went to tech startups last year, black founders received just 1% of it. And most of this 1% comes from their non-profit part of the fund akin to philanthropy that they can easily write off. So there is a big diversity problem. Most African governments or private sectors have not invested a lot in venture capital funds.


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Even when as a black founder, you make a pitch to these white dominated venture capital funds, however good your idea is, you will certainly be turned down. That’s just the reality. Most venture capital funds don’t have any black startups as part of their investment portfolio.

First, when a venture capital fund or a seed investor agrees to fund your tech start up, they normally want to do so through a document called a term sheet, which is a bullet point document outlining the material terms and conditions of the business agreement. Normally after a term sheet has been executed, it guides legal counsel in the preparation of a proposed final agreement. Even when you know so much about term sheets, you still need to be able to negotiate a good deal. Interestingly, many people, including many lawyers, are weak negotiators.


There are only three things that matter when negotiating a financing: achieving a good and fair result, not killing your personal relationship getting there, and understanding the deal that you are striking. Some people are of the view that a good deal means neither party is happy. I don’t agree. This might be true in litigation or acquisitions where it’s a one off investment exit strategy, but if neither party is happy following the closing of a venture financing, then you have a real problem. Remember, the financing is only the beginning of the relationship and a small part of it at that.

A great starting point is for both sides to think they have achieved a fair result and feel lucky to be in business with one another. If you behave poorly during the financing, it’s likely that tensions will be strained for some time if the deal actually gets closed. And if your lawyer behaved badly during the negotiation, it’s likely that lawyer will be looking for a new client after the venture capitalist (VC) joins the board.

This should be a major take away for you the entrepreneur; your lawyer shouldn’t have unreasonable positions, but this doesn’t mean you should advise your lawyer to behave in a milquetoast manner during negotiations, especially if he is well versed in venture financing, which most Ugandan lawyers aren’t, anyways. You need to manage this carefully as the entrepreneur, even if your eyes glaze over at legalese. This is your company and your deal, not your lawyer’s. You can learn a lot about the person you are negotiating with by what that individual focuses on.

Prepare for the Negotiation 

The most unfortunate bit is to go for a negotiation without preparation. Many people don’t prepare because they feel they don’t know what they should prepare for. We will give you some ideas, but realize that you probably do know how to negotiate better than you think. You already negotiate many times a day during your interactions in life, but most people generally just do it and don’t think too hard about it.

When you are going to negotiate your financing (or anything, really), have a plan. Have key things that you want, understand which terms you are willing to concede, and know when you are willing to walk away. If you try to determine this during the negotiation, your emotions are likely to get the best of you and you’ll make mistakes.


Always have a plan

Next, spend some time beforehand getting to know whom you are dealing with. Some people are so easy to find, that you can Google them and know just about everything they think. If they openly state that they think people who negotiate certain minor terms in a term sheet are idiots, then why on Earth would you or your lawyer make a big deal about it?

If you get to know the other side ahead of time, you might also be able to play to their strengths, weaknesses, biases, curiosities, and insecurities. The saying “knowledge is power” applies here. And remember, just because you can gain the upper hand in using this type of knowledge doesn’t mean that you have to, but it will serve as a security blanket and might be necessary if things turn south. One thing to remember: everyone has an advantage over everyone else in all negotiations. There might be a David to the Goliath situation, but even David knew a few things that the big man didn’t. Life is the same way. Figure out your superpower and your adversary’s kryptonite.

Learn some game theory

Before we delve into that, let’s spend a little time on basic game theory. Game theory is a mathematical theory that deals with strategies for maximizing gains and minimizing losses within prescribed constraints, such as the rules of a card game. Game theory is widely applied in the solution of various decision-making problems, such as those of military strategy and business policy. Game theory states that there are rules underlying situations that affect how these situations will be played out.

These rules are independent of the humans involved and will predict and change how humans interact within the constructs of the situation. Knowing what these invisible rules are is of major importance when entering into any type of negotiation. The most famous of all games is the prisoner’s dilemma, which you’ve seen many times if you’ve ever watched the hit TV series ” billions.”

Negotiating in the Game of Financing

A venture financing is one of the easiest games there is. First, you really can have a win-win outcome where everyone is better off. Second, you don’t negotiate in a vacuum like your hypothetical fellow criminal co-conspirator. Finally, and most important, this is not a single instance game. Therefore, reputation and the fear of tit-for-tat retaliation are real considerations.

Since the VC and entrepreneur will need to spend a lot of time together post- investment, the continued relationship makes it important to look at the financing as just one negotiation in a very long, multiplay game. Doing anything that would give the other party an incentive to retaliate in the future is not a wise, or rational, move. Furthermore, for the VC, this financing is but one of many that the VC will hope to complete.

Therefore, the VC should be thinking about reputational factors that extend well beyond this particular interaction. With the maturation of the venture capital industry, it’s easy to get near-perfect information on most VCs. Having a negative reputation can be fatal to a VC in the long run.

Depending on the type of person you are negotiating with, the VC either will be sensitive to your boundaries or will force you outside these boundaries, where BATNA (best alternative to a negotiated agreement) will come into effect. If this is happening regularly during your financing negotiation, think hard about whether this is a VC that you want to be working with, as this VC is likely playing a single-round game in a relationship that will have many rounds and lots of ups and downs along the way.

Finally, don’t ever make a threat during a negotiation that you aren’t willing to back up. If you bluff and aren’t willing to back up your position, your bargaining position is forever lost in this negotiation.

Things Not to Do

There are a few things that you’ll never want to do when negotiating a financing for your company. As we stated earlier, don’t present your term sheet to a VC. In addition to signaling inexperience, you get no benefit by playing your hand first since you have no idea what the VC will offer you. The likely result is either you’ll end up starting in a worse place than the VC would have offered, or you’ll put silly terms out there that will make you look like a rookie.

If your potential funding partner tells you to propose the terms, be wary, as it’s an indication that you are talking to either someone who isn’t a professional VC or someone who is professionally lazy. If the other party is controlling the negotiation, don’t address deal points in order of the legal paper. This is true of all negotiations, not just financing. If you allow a person to address each point and try to get to closure before moving on to the next point, you will lose sight of the deal as a whole.

While you might feel that the resolution on each point is reasonable, when you reflect on the entire deal you may be unhappy. If a party forces you into this mode, don’t concede points. Listen and let the other party know that you’ll consider their position after you hear all of their comments to the document. Many lawyers are trained to do exactly this—to kill you softly point by point.

A lot of people rely on the same arguments over and over again when negotiating. People who negotiate regularly, including many VCs and lawyers, try to convince the other side to acquiesce by stating, “That’s the way it is because it’s the market.” We love hearing the market argument because then we know that our negotiating partner is a weak negotiator. Saying that “it’s the market” is like your parents telling you, “because I said so,” and you responding, “But everyone’s doing it.” These are elementary negotiating tactics that should have ended around the time you left University.

In the world of financing, you’ll hear this all the time. Rather than getting frustrated, recognize that it’s not a compelling argument since the concept of market terms isn’t the sole justification for a negotiation position. Instead, probe on why the market condition applies to you. In many cases, the other party won’t be able to justify it and, if they can’t make the argument, you’ll immediately have the higher ground.

Finally, never assume that the other side has the same ethical code as you. This isn’t a comment against VCs or lawyers; rather, it’s a comment about life and pertains to every type of negotiation you’ll find yourself involved in. Everyone has a different acceptable ethical code, and it can change depending on the context of the negotiations. For instance, if you were to lie about the current state of a key customer to a prospective VC and it was discovered before the deal closed, you’d most likely find your deal blown up.

Note that this is directly in contrast to most behavior, at least between lawyers, in a litigation context where lies and half-truths are an acceptable part of that game. Regardless of the specific negotiation context, make sure you know the ethical code of the party you are negotiating against.

But if venture capital funding fails because of the colour of your skin, reach out to your wider network. If you have invested time in building networks, they could be richer than you think. Your networks can get you a market for your product that could sustain you.


Louis is a lawyer in general Commercial law with expertise in Capital Markets, Securities law, structured financing, Fintech, venture capital and data protection

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