Negotiating a term sheet

It shouldn’t take more than a week, or even just a few days, to negotiate a term sheet, once a VC decides they want to do a deal. There really aren’t many variables these days, really just price and how much you raising / selling.

Most of the rest of the terms are much lower drama than they used to be. Most VCs aren’t trying to control your board and your company in the early days anymore. (If they do, that may take longer to work out).

So what are the tips to get the best deal — but also to ensure the deal closes?

A few learnings and insights:

  • It doesn’t really matter “who goes first”. Many founders will expect a VC to “go first” and make an offer. They may also think it gives them some leverage. Perhaps it does, in later stage and oversubscribed deals, and in general at the margin. But going first also might have advantages, in letting you anchor high. I am just not sure it much matters in earlier stage investing. Personally, I just ask. “What is your ask? How much are you raising? What valuation are you looking for?” It’s not a game for me, at least. I just want to know. I just want to know if I can do it, if I can meet the ask.
  • But what really gives you leverage, if you want it, are multiple offers. Going first, last, in the middle doesn’t matter nearly so much as having other options. Just not needing money at all right now helps. Being about to run out — does not. And having another real offer, from as good of an investor, also quickly ends games and shrinks timelines.
  • Ask for too much money, you may lose the VC. That may be OK, but be aware of it. Most VCs have ranges of check sizes and valuations. So if you might take $3m, but ask for $6m … and the VC firm can only do a $3m check … they may just opt out. So signalling flexibility on the amount you want to invest, especially with smaller funds (<$100m), increases the odds a deal can be done.
  • Raise issues ahead of time, and offer solutions — especially if you are overfunded. No VC wants to invest in a company that has raise too much money to get to a certain stage. How much is too much? Roughly, $2m is too much before an early seed. $5m is too much before a late seed / Pre-A round. $10m is too much before a Series A. If you have raised too much, don’t hide it. Acknowledge it and be clear you’ve talked to the existing investors — and they are OK raising at a price that will work for the new investor(s). Similarly, if for example, you have issues with an ex-founder (not uncommon) — don’t hide it. It will just blow up on you later. By the term you approach a term sheet, there should be No Surprises.
  • Ask for a VC’s ownership target in the round. Just ask. Most VC funds have minimum ownership stakes. It could be small in a pre-seed round (e.g., buying at least 2% or 5% or 7% of the company). And it might be large in a Series A (buying at least 20%). Most important is just to ask. If you aren’t selling / offering enough of the company to meet a VC’s model, they may just opt out. Best to just know.
  • Be clear where you stand on board seats. If a VC is investing enough money for a 8%+ stake, they will often ask for a board seat. Are you OK with that? Is there a line where you are OK, and where you aren’t? Figure it out. Some VCs may pass if they can’t get a board seat. Others won’t care. Still others may be in the middle.
  • Aggressive is good. But too aggressive may turn some investors off. Every VC knows how hard it is to build a unicorn, and want to see that commitment. But if you are so confident that the VC feels like you aren’t actually even interested in them, some will just opt out. (I do.). VCs want aggressive, but they also want to make sure the CEO is someone that want to partner with for 10+ years. Also try to be that person.
  • Listen before you counter too hard. Some VCs will leave room to counter, say another 10% in pricing, sometimes more. But others won’t. It is OK to ask. Just be careful to listen back. If you hear a VC getting uncomfortable about raising the price, if you really hear discomfort — maybe don’t push it too hard after that. At least not if the offer is already OK and that’s your top choice. VCs have structural lines. Sometimes, they will still do it if the lines are crossed, but even there, they never forget. It’s probably not worth it.
  • Don’t sweat the small stuff. Make sure you have a good corporate start-up lawyer. Most of the terms just don’t matter. Who gets Registration Rights? Doesn’t matter. Details of a co-sale agreement? Doesn’t matter. SAFEs vs. equity? Really doesn’t matter. Who pays legal fees for investor’s counsel? Doesn’t matter (it’s not that much). Focus on what matters (price, ownership, and sometimes, control). Let the small stuff go.
  • Time can be your ally, if you are doing well. You’ll want to go fast, but if you are growing quickly, sometimes giving an investor more time to get to a term sheet can only help you. They make like you at $20k MRR growing 15% a month, but love you just a few months later at $50k MRR. Fundraising is annoying, but if you really don’t need the money this week, it can pay off to be zen about exactly when & how.
  • Putting a super tight deadline on a VC can get folks to move fast. But it can also blow up on you. So just be careful how you play this card. When you tell a VC that have a tight deadline to meet, they will listen. All VCs know how to move quickly if they need to. They will often drop everything to work on a super hot deal, in fact. But they may just walk if it is too tight. Make sure you are OK with that. When in doubt, just be transparent on all timelines. When in doubt, just be as transparent on everything you can in fundraising. It will make your life simpler, and build trust.
  • Have your existing investors lined up to support you. This may be tip #1. If your existing investors aren’t 100% supportive, that can be a big flag, even fatal to a fundraising. By contrast, if you have prestigious existing investors, and they are excited to invest more — that can make it 5x easier to close the next round. At least talk to them, try to line them up — and know where you stand, and where the issues may be.

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Published on July 23, 2019

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