TL;DR - Founders should hire experienced lawyers, avoid inefficient legal costs by sharing counsel, avoid any unnecessary due diligence, and finalise a term sheet within 48 hours of receiving it.
Helpfulness - 5
Tags - term sheet, term sheet mistakes, term sheet negotiation, term sheet advice, venture capital, venture financing lawyers
- What do founders need to do to avoid some common mistakes during term sheet negotiation?
- Why should founders hire experienced lawyers?
- In order to avoid common mistakes during term sheet negotiation, founders should:
- Only hire lawyers who have enough experience with venture financings.
- Inexperienced lawyers often push for irrelevant things, which can create a hostile atmosphere and ruin the relationship of trust between the investor and the founder.
- Good lawyers can educate founders on various terms and their meaning from a practical standpoint.
- Know that negotiating within new industries is tricky.
- Negotiating a term sheet can be much more complicated if the startup operates within a new industry due to the lack of precedent to refer back to.
- Founders should ask around the margins and try and work with law firms that have worked on similar projects.
- Avoid inefficient legal costs by sharing counsel.
- Historically startups are required to pay not only for their own legal counsel but also their investors’ counsel, so if a founder has multiple investors drawing up term sheets, he/she should ask them to share counsel.
- Steer clear of any unnecessary due diligence to save time and resources.
- Finalise a term sheet with their lawyers within 48 hours of receiving it from the investor before having a conversation with the investor to reach a compromise.
Follow up links:
- What to negotiate in a term sheet, https://www.atrium.co/resources/whitepapers/term-sheet-negotiation-tips/