By now we all know the recession has had (and is still having) a significant impact on venture capital investments. It is also restricting the amount of venture debt assumed by startup companies as this form of capital funding is somewhat tied to the amount of deals funded by VCs.

The global economic slowdown is not the only reason venture debt fundings have slowed. With the recession and the damage that followed came the realization by many in the VC and startup ecosystem that this debt actually needed to be repaid! This sobering reality has caused a material drop in requests for venture debt from companies who raised venture funding.

In past postings, Gerry Langeler has been discussing what happens “behind closed doors” at OVP and why they often say “No”. This posting is a story about what happened to one company after OVP and others said “No”.

It begins when I was approached by a friend to look at a company in the alternative energy space. The founders were two scientists, neither with any real management experience, but with what seemed like a true breakthrough idea in the market they were targeting.

While the idea was new, the market wasn’t. In fact, tens of millions had been invested in the market by quality venture capital firms with no real commercial success. So how could a couple of guys from Seattle, working in the equivalent of their garage, come up with a breakthrough in the space? And more importantly, given their inexperience and lack of a real team, how could they build a company?

One of the thorniest problems in taking investment dollars from corporate strategic investors is the risk of "selling the company without selling the company."  You want the money, you want the benefit of the power that corporate partner can bring, but you don't want to be arbitrarily capping your upside.  However, the corporate partner has a set of worries, too.  They don't want to give you money so you can make yourself so valuable they can't afford to buy you later, when you have grown into a significant enterprise.  So, how to you deal with these conflicting issues and goals?

Recently, we saw a negotiation settle around a tried-and-true model from the world of sports - baseball binding arbitration.  The model worked like this:  The strategic investor would put their money in for X% of the company.  In addition, they received an option to buy the entire startup at any time over the following three years, unless the company filed for an IPO.

Now for the tricky part:  How do you set the price today for a possible event up to three years from now without either capping your upside (if you are the entrepreneur) or paying for value you helped create (if you are the strategic investor)?