Raising VC Money: How to Negotiate a term sheet by Jo Tango

  • Source link: https://jtangovc.com/how-to-negotiate-a-term-sheet/
  • TL;DR: When negotiating a term sheet, you should retain a lawyer who knows well VC Financings, own the negotiation, stack rank the open issues, qualify the VC’s interest level, not engage in term sheet wars, always remain calm, and be honest.
  • How helpful? : 5/5
  • Topic Tags: negotiation, term sheet
  • Relevant questions addressed: What are some principles to keep in mind when I approach term sheet negotiations with VCs?
  • Summary bullet points
  • Retain a lawyer who knows well VC financings
    • Common mistake is hiring a strong lawyer who has expertise elsewhere
  • Own the Negotiation
    • Attorney should be sounding board, but you should still negotiate the financing
  • Stack rank the open issues
    • The VC will propose terms and you will have amendments. You will not get everything you want, nor will they. If you can both communicate what you really need in order of importance, it's easier to reach a win-win
    • Inform your attorney of what you really want. “Some younger attorneys are very aggressive about showing their value to you and will fight for a particular term to show how they’re helping you. I think that’s all fine and good if it’s a term you actually care about.”
  • Qualify the VC’s interest level
    • Since most term sheets have a “no shop” clause, it’s important that you make sure the VC is actually interested in investing. You don’t want to wait around for a while only to have them drop out
  • Do not engage in term sheet wars
    • Instead of telling your attorney to tear apart term sheets you don’t like and ensue in a back-and-forth with the VC, call the VC directly and work out the issues. Then inform your attorney of the changes. This saves lots of legal fees and is better business
  • Always remain calm
    • If you become overly emotional, erratic, and lose your cool during term sheet negotiations, it reflects poorly on your ability to perform well under pressure.
  • Be honest
    • VCs will not do business with you if they sense a lack of integrity, and you should not do business with a VC if you sense a lack of integrity. “The average time to exit for a start-up is now nine years. Don’t partner with a VC unless your instincts give it a resounding yes.”
  • Follow up links

How to negotiate legal documents: https://jtangovc.com/how-to-negotiate-the-legal-documents

How to get the VC meeting: https://jtangovc.com/how-to-get-the-vc-meeting/