Renewing OCSC Startup Company Member: YouAttest
OCSC Renewing Startup Company Member: TerraManta

How to Negotiate Term Sheets with VCs

An article we liked from Thought Leader Alex Iskold of Startup Hacks:

7 Tips for Founders When Negotiating Term Sheets with VCs

Founders are always at a disadvantage when negotiating with Venture Capitalists.  How to Negotiate Term Sheets with VCs

Why?

Simply because Founders only negotiate fundraising a handful of times during the life-time of the company, while VCs negotiate all the time.

In addition, the institutional investors are always very clear about their goals and their math, while Founders most often just get hung up on pre or post money valuation, which is only one of the important deal terms.

So what can Founders do to level up and negotiate to the outcome they want?

1. Get the first term sheet

There is nothing more important in the financing than getting the first term sheet. So how do the Founders get there?

  • During every interaction with VC ask: Where are we in your process?
  • You should met the lead partner at least a few times before you get a Term Sheet
  • You will likely need to present to entire partnership, especially for Series A and later rounds.
  • Knowing the above should help you figure out how far from the Term Sheet you are
  • Literally - ask for the Term Seet, ask when can you expect a Term Sheet - remember - if you don’t ask you might not get

Push for the first Term Sheet as it is going to be critical for both closing the round and getting other Term Sheets.

Now here is the really important thing that you as a Founder need to understand.

VCs hate issuing the term sheets that do not get signed.

Let me repeat it again. VCs hate issuing the Term Sheets that do not get signed.

Why? Because VCs hate to lose deals.

Once VC does the work, gets the conviction and issues a term sheet, they want to win the deal. Many firms, especially large, top-tier firms keep track of how many of their term sheets convert. Junior partners can get serious heat for issuing the term sheet and not getting the deal because it is damaging to the firm’s brand.

This is why getting a Term Sheet issued is so critical - it shifts the dynamic in the favor of the founder.

VCs know this too, and thats why before issuing a term sheet, VC is going to try their best to figure out a) What will get the deal done b) More importantly, will you take the term sheet.

What they are going to do is to schedule a call with you, where they will verbally go through the deal, and then will ask you if you will accept this deal?

Now here is a critical negotiating tactic.

  • Even if you dislike the terms.
  • Even if you are insulted by the offer.
  • Even if you think the firm wasted your time.
  • Even if you aren’t sure you will end up working with this firm

Say one thing and one thing only:

Thank you. We are excited at the prospect of working with you. Please send me the Term Sheet so that I can discuss with my team and my board and then get back to you.

Do not react in any other way, do not negotiate live (More on this below).

Say one thing, and one thing only. The thing I said above.

The reason it works is because there is simply no way to enumerate verbally all the terms that are spelled out in the term sheet. For example, VC can discuss the valuation, the pool, the board composition, but still — while these are major terms — there is going to be more in the actual term sheet.

So your move is simple - ask for the Term Sheet.

By getting the actual Term Sheet into your inbox, you are accomplishing these key things:

  • You are closer to finishing your round (well, yeah :)
  • You know the VC actually intends to invest - no one is going just to send you a formal Term Sheet unless they want to do the deal
  • You have a formal written Term Sheet, which is what you need to negotiate
  • You are getting leverage

2. Leverage the leverage

Ah the leverage… Amazing when you have it, and sucks when you do not.

Well, once you get a format Term Sheet from a VC you immediately have 2 types of leverage. First with the firm that sent you the term sheet. Second, the leverage over the entire round.

Let’s unpack both now.

First, once the firm issues a Term Sheet, they signal that they want to get the deal done. So even if they are the only option you have (as actually the case in most financings) you still are in a better position to negotiate than you were prior getting the Term Sheet.

More importantly, you now have the leverage to go back to other firms and tell them you have Term Sheet.

Nothing, and I mean literally nothing, makes VCs move faster, than you telling them that you have a Term Sheet from another firm.

And by moving I mean in one of two directions - either passing or finishing their work asap and sending you an alternative Term Sheet.

The FOMO in VC business is real. Term Sheet from a competitor causes FOMO, and causes VCs to act.

Once you get everyone in the process to either pass or to give you a Term Sheet you are now in the position to...

Read the rest of this article at startuphacks.vc...

Thanks for this article excerpt to Alex Iskold of Startup Hacks.

Photo by Pavel Danilyuk from Pexels

Want to share your advice for startup entrepreneurs?  Submit a Guest Post here.

WHAT’S YOUR NEWS? - Submit your company news, deals, opinions, or job listings here for FREE PUBLICITY.

See the Directory of OC StartupsJoin the OCSC to list your company, too!

AND - Subscribe for FREE OC Startup News here!

OR, WHAT DO YOU THINK?  LEAVE A COMMENT BELOW!

Comments

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Working...
Your comment could not be posted. Error type:
Your comment has been saved. Comments are moderated and will not appear until approved by the author. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.

Working...

Post a comment

Comments are moderated, and will not appear until the author has approved them.

Your Information

(Name and email address are required. Email address will not be displayed with the comment.)