Term Sheet Negotiation: How to Avoid Common Mistakes by Niko Bonatsos

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

Questions answered:

  • What do founders need to do to avoid some common mistakes during term sheet negotiation?
  • Why should founders hire experienced lawyers?

Summary:

  • 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.

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