A term sheet is a document that explains the amount and terms of your investment in a company. While term sheet vary by company, investor, and even round, there are some key points to consider when negotiating a funding round.
Why You Should Negotiate with Investors?
Every business relationship is also a partnership. Both sides of the table want a reliable and capable partner and someone who can help them achieve their goals. When negotiating with VCs, you should keep in mind that VCs are looking for good partnerships.
How can you show that you are the best partner for them?
Partly through careful negotiation. Accepting the terms offered at face value can erode your credibility (do you value your startup enough to negotiate?). On the other hand, throwing all the details out of your term sheet can make you look inexperienced and waste valuable time.
To avoid wasting time or appearing inexperienced, educate yourself, focus on what’s important, and speak up if something goes wrong. Show the VC that you are knowledgeable. Show them that you will stand up for the important issues.
The VC knows which talking points are important, and will not be surprised if you raise them. Just make sure that your positions are fair.
Can you do it alone or do you need a lawyer?
It founders want to save money and avoid expensive legal fees, but there’s a reason lawyers still have jobs. In a nutshell:
Experience Points – Nothing beats experience. The startup attorney has been involved in fundraising, mergers and acquisitions, and other liquidity events. They know what to expect when their negotiated rights are exercised.
Lawyers also help you navigate the dense legal jargon that seems to say one thing but really means another.
An attorney can help you if you later have questions about whether the terms of your term sheet are legally binding, especially when dealing with local law. Bottom line: If you find a good startup lawyer, don’t let them go.
What does a good term sheet look like?
No two term sheets are the same, but there are many common term sheet formats. These include Equity Finance, Convertible Loans, and newer Convertible Loan variants used primarily in the United States, such as KISS, SAFE, and Convertible Equity. After examining the
data, we found some interesting patterns regarding convertible loans. Read more about this here. The term sheet for the
Equity Financing Round differs from that for the Loan Round.
As a founder, it’s important to know what a good term sheet looks like. Y Combinator explained why the above term sheet is good for you.
Focus on the Important Clauses If you feel overwhelmed by all the
terms, first focus on these six clauses. They are often the most important and most negotiable.