Today @jefielding @MacConwell and I talked about term sheets and how to negotiate them. What to look for? How to negotiate?

Here are some key takeaways from that conversation

Read on >>

1) First, what is a term sheet (in this context)?

It's a summary of terms for an offer to invest that an investor will give you ahead of much longer legal docs.

2) It'll include things like:
-how much the investor will invest
-at what valuation
-min threshold that needs to be met (if any)
-any Board Seats that the investor will get
-employee option pool that needs to be created
-liquidation preferences
-etc

3) It's important to have a good startup lawyer ready to go when you get a term sheet.

Don't just work w/ the cheapest lawyer. Or your friend. Find someone who regularly works w/ startups.

4) Once you get a term sheet, run it by your lawyer. Find out what is standard or not standard in your term sheet.

This is why a lawyer is so impt, because he/she will have seen MANY term sheets before and will be able to advise you on new norms.

5) If you are raising money from intl investors as a US company, keep CFIUS in mind. The US gov - for security reasons - has enabled itself to be able to undo equity transactions as it sees fit with investors from countries it's not super friendly with.

6) Regardless of what is in your term sheet, just getting a term sheet -- ANY TERM SHEET - is great. It gives you leverage.

Don't sign it yet. Use it to negotiate.

7) Go individually email each investor you're speaking with
something like "Hey A - just wanted to update you & let you know we have a term sheet. We'd love to work with you, and if you're strongly interested in this, have a few min to catch up by phone in the next 24 hrs?"

8) Set up calls with those that are really warm. On the call, mention that you have a term sheet.

Things you can say:
-you have a term sheet but haven't signed it

Things not to say:
-valuation
-which investor gave you the term sheet

9) Even if pushed to tell who or what the terms are, DON'T tell.

You can always respond politely, "Haha -- we both know that I can't talk about that."

10) Gauge in the call how interested the investor is. Ask what the process from here (and timeline) would be to make a decision.

If asked for what you are looking for, you don't need to cite the existing term sheet -- ask for roughly what you want.

11) I.e. "We got a term sheet. But I REALLY enjoyed mtg you through this process. We would most likely go with you if you could work with something like $x on $y valuation"

12) Say the 1st term sheet was $5m on $25m post money valuation.

You go to another investor & say "We would LOVE to work with you & would most likely go w/ you if you could do $6m on $30m post"

13) Say the investor comes back offers you $6m on $30m post. If you like both investors, you can use this to leverage the 1st offer.

"We would LOVE to work w/ you. But, we have another term sheet. We would most likely go w/ you if you could raise your offer to $7m on $35m post"

14) And if that investor does, you can see how you've now been able to bump up your offers. I wouldn't do this too much tho -- investors will feel a bit played, and you don't want to sour the relationship.

Just try to ask for what you want the first time.

15) If the 2nd investor balks & thinks your offer is too high & says they are out, you can still salvage the situation.

Ask, "Can you level w/ me? What is the best offer you think you can do? I would really like to work w/ YOU and would like to try to make this work"

16) If the 2nd investor doesn't offer you what you want, it's still ok to take their offer. Or the first offer. Valuation isn't everything. And you've left the door open and have been non-committal to both parties the whole time.

17) In fact, valuation is definitely NOT the only thing to consider.

-liquidation preferences (what multiple the investor gets paid before everyone else)
-option pool size
-Board seats / composition

These are all impt considerations!

18) In addition, it's impt to do REFERENCE checks on any investor whose deal you are strongly considering IF they give you a term sheet.

Make sure to talk with at least 1 founder whose company they backed that did NOT go well.

19) Don't just do a reference check on the firm. Do a reference check on the person who would be your point of contact.

The individual investor matters MORE than the firm.

20) Lastly, once you sign, it's binding. You've agreed to go with that investor. Pick carefully...it's a long term relationship and it's impt that you like the person, trust the person, and have good rapport.