Today I chatted with founders of a growing software company who are trying to land a big multiyear customer contract and raise capital from investors. They’re considering raising a $2 million round of venture capital.
They proposed a $2.8 million two-year deal to their potential customer. The customer pushed back, saying $1M per year would be easier to get board approval on. The founders have internally agreed that $1 million per year would be a great deal, but they haven’t communicated that to the customer. I saw an opportunity to kill two birds with one stone.
I pointed out to the founders that this deal has the potential to provide them with the capital they would raise from venture investors. It will be important to negotiate favorable payment terms.
Here’s what I suggested: Write up the contract as a $2.8 million deal over two years paid in equal monthly installments. Offer a discount of about 29%—$800K—if the customer pays the entire two-year contract—$2M—up front. This deal gives the client a strong incentive to pay up front. If they do, the founders will have the $2 million in capital they’re seeking to grow the business without giving up any equity in the company. If the client doesn’t want to pay up front (or can’t), the founders get a premium for taking monthly payments. I’d imagine there would be some negotiation. If they negotiate a $2 million deal paid in two annual $1 million payments, that’s still a win for the founders. They’d get $1 million Jan 2023 and another $1 million Jan 2024 to fund growth for each of those years.
Customer revenue is always the best way to finance growth. Founders should be mindful of this when negotiating and consider offering major customers terms they won’t want to turn down—if they pay up front.