Demystifying the myth about the “Term sheet”
At some point in the process of you trying to get a VC to invest in your company, you will inevitably need to talk legal and paperwork. This process starts with a term sheet, which is a letter of intent or “an offer” provided by the investor. The term sheet outlines the terms under which he or she is willing to put money into your company. There is obviously a strong formal element to negotiating the terms, because a signed term sheet will be the basis for the investment agreement and will set out the rules of the game in your new partnership. Often even more important or crucial to the process is the informal dynamics that the term sheet negotiation brings.
What to expect?
Before you got to the stage of getting a term sheet, you probably had multiple meetings with the investor. Your discussions were all about the product, team, marketing strategy, competition etc. It was all one big pitch. But now that you have this term sheet on the table, you need to protect your interests, right? Well, yes, of course, but ‘try not to piss on your shoes’ in the process. For an investor, especially early stage, term sheet negotiation is really the first time you reveal your true character. It’s a kind of a sneak peek into the future (still potential) partnership.
Because regardless of what you think, every smart early stage investor is going to give you a balanced term sheet. Balanced meaning without malicious intent to “steal” your idea and take over your company. Therefore, its purpose is to have a sound foundation and aligned interests with you as a founder in the long term. Don’t worry, no deal is going to fall apart because you are only willing to give up 6, instead of 8 per cent of the company’s equity, but because of the way you communicate and argument your position. An investor wants to see your attitude in conflict resolution and your willingness to work with a partner. Of course, it is a “negotiation”, but remember that once you sign that document, you are all in the same boat and want to see the company grow and create value.
How a deal can go down.
We have recently been talking to a team of great founders with a promising product. Mostly everything has been agreed to (yes, including valuation), and then they bring up the issue of paying out dividends. FYI, this was a company with zero revenue. So OK, we sit down with them and try to explain why it makes no sense to think about dividends and what our joint focus for the next 24 months should be. Still, they insisted on defining a dividend policy for the company. It was a really good insight into their mindset and we ended up not investing into the company not because we couldn’t agree on a dividend policy (there would not be anything to share anyway), but because of the way they perceived priorities and what they focused on.
In addition to all mention previously I have just few things to share:
Choose your battles wisely, keep a positive attitude and you should be fine.