How to Raise $20 Million in 7 Steps, Lesson 7

How to Negotiate Your Term Sheet and Deal

The moment you’ve been working towards has finally arrived — you’ve gotten a term sheet from an investor. It’s thrilling, and it’s a result of all the hard work you’ve put in from the start. Negotiating this term sheet and your deal is incredibly important, because it sets the tone for your relationship with that investor and the long-term success of your company. You want to do it quickly, and do it well. Here are a few things to remember when negotiating the terms of your deal: 

Familiarize yourself with term sheets

If you don’t know the lingo of term sheets, get familiar. This seed fundraising resource has a glossary of terms. There’s no shortage of education on the internet that can help you understand what’s what and what’s important. Talk to other founder friends. Talk to advisors. Talk to legal counsel. Do your research ahead of time so you’re well versed on what should and shouldn’t be on your term sheets. Review standard SAFE terms here.

Get legal help

Many legal firms have deals in place to only be paid by startups after they close their funding rounds. There’s no excuse not to have legal counsel. They’ll help educate you on the term sheet and the process of the deal, and they’ll focus on all the most important parts. You still need to be the one pushing the deal and negotiating, but they’ll be there to make sure you’re advised on the legal implications in the deal. We believe it’s best to obtain counsel when you start the process itself, so you can tell the investors about the deal terms you’d like and the fundraising vehicles you’ll use — rather than the investor suggesting those for you. Here’s a resource for things to consider when getting legal help. 

Try to have more than one investor interested

Like any good negotiation, leverage is incredibly important in getting what you want. In an ideal world, you’ll want to wait to have term sheets from multiple VCs before you start negotiating. This will help you get the terms that are most important to you, and ensures that you won’t be completely dependent on the interests of one singular VC. 

Know what’s a non-negotiable to you ahead of time

You want to know what is the absolute most important thing to you amongst the terms that will come up. Pick a few things that are of the utmost importance to you, and focus on getting those. This shows investors that you know what’s important and will speak up accordingly, instead of negotiating every single minutiae of a deal. This could include things like number of board seats (which directly impacts decision-making control of the company), ownership percentage, decisions that require board consent, liquidation preferences and more. 

Make the terms simple and straightforward

When you receive a term sheet, try to keep your needs as clear and focused as possible. The more straightforward the terms are, the better off you’ll be. You’ll want everything to be as clean as possible. Most seed round term sheets are only a couple of pages, and many are formulated using the Simple Agreement for Future Equity by Y Combinator.  There are, of course, alternatives, and this is why you should heed our earlier suggestion to obtain legal counsel — and do so early in the process. 

Valuation is the core of the negotiations

The valuation in your term sheet should be one of the most important things you focus on and negotiate. You may want to consider taking a lower valuation if it gets you the investor of your dreams. If you’re raising money to build your company, you must believe you can build a billion-dollar company. And if you believe that, even a smaller slice of the pie is an incredible financial outcome. If it is SAFE, valuation is deferred, except for the ceiling. 

Talk about governance

The governance of your company and board of directors is crucial. You’ll want to closely examine who has veto rights, and the representation on the board should reflect the makeup and control of your cap table. Understand the factors that determine control of your board and make sure you’re positioning yourself well. 

Do diligence

Your investors aren’t just writing you a check. They will build your company with you in the coming years. So it’s worth asking: Do you like these people? Do you trust them? Who invests in their fund? Do your own diligence on the potential investors. Call founders who have worked with them. Call former employers. Ask around. This is one of the biggest decisions you’ll make in shaping your company. 

7 Questions to Help You Choose Your Investors Wisely Worksheet:

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