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Term Sheet Negotiation With Strategic Investors

Term sheet negotiation is an important part in the life of a VC. Now you can ace in it by using these 5 tips to negotiate term sheets.

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Term Sheet Negotiation With Strategic Investors : Introduction

A term sheet is an agreement that contains all the terms and conditions of a business deal.  The term sheet denotes the interest of an investor to invest in your business but doesn’t assure an investment. A crucial part of the terms sheet is to conduct a negotiation process. 

A successful term sheet negotiation can be beneficial for both sides. It is important to structure a deal in a way so that it benefits both parties as the potential investor is going to be there for a long term in the business. 

Tips to Negotiate Terms Sheets with Strategic Investors

Term sheet negotiation is not an easy task. It demands a lot of attention to detail and familiarity with the market. Keep in mind these 5 points which will help you finalise a quick deal benefiting both sides. 

1. Know the Market Standards

This is the very first step, knowing the market helps you to analyse the potential of your business and different trends that have been successful in the present era. 

  • Get prepared for completing the session before the term sheet arrives
  • Have a word with other founders and references involved in the business market. It can provide a sense of market standards
  • Remember that standard market terms can vary based on the stage and the industry the business is involved in. 

2. Find Business Founders Whom You Can Rely on for Perfect Guidance

Having an experienced mentor figure will help during the negotiating period.

  • Discuss with someone who has more experience in the sector
  • Also, get in touch with founders who have completed complex term sheet negotiations
  • They can provide tips that will alert you and help you find out the red flags in the deal
  • They will also provide tips to increase your company’s growth.

3. Do a Background Check on Your Investors

It is crucial to know your investor. Go ahead and do a background check on them to analyse their past deals and other investments. Based on the information, come to a decision whether the investor is suitable for a long-term relationship and how they can add value to your business. 


4. Analyse the Contract & Terms in Progress

You must analyse the contract and other broad terms in advance before finalising the term sheet. 

  • Finalise the comprehensive terms with your VC before the term sheet is completed 
  • Make sure that you and the investor are on the same page
  • If unable to meet the expectations of the investors it is better to terminate the proceedings at the initial stage on good terms. 

5. Keep It Simple

Keeping it simple is the best way to ace the terms sheet negotiation. Making it more complicated will not do the trick.

  • Term sheets in the beginning stage of investment should be simple
  • The language should be apt and clear
  • A simple term sheet should contain 2–3 phrases that are important to the contract.

Term Sheet Negotiation With Strategic Investors: Important Issues That Have to Be Negotiated in the Term Sheet

Since you have the tips to negotiate term sheets, these are important factors that have to be included in the VC term sheet. Experts at Vakilsearch highly recommend you to go through these terms clearly and make sure that your VC terms sheet is perfect. 

1. Valuation and Dilution  

When it comes to drafting your VC terms sheets, Vakilsearch experts suggest you get the company valuation done perfectly. 

  • It is one of the significant steps, and has to be done immediately 
  • Often it is believed that a lower valuation from an experienced investor is trustworthy. 

2. Liquidation Preference

  • It is the most crucial aspect according to the investor’s point of view
  • The liquidation preference shows the recovery that an investor earns in a deal with the firm
  • It can have a substantial influence on the founder’s gain.  

3. The Board of Directors

Board representation is crucial for any company. It is important to lay out the terms and conditions before providing the investor role on the company’s board of directors.

  • The Board of Directors and administration of the firm, and terms and conditions are crucial factors
  • It is mandatory to analyse the company’s Pre-Money Valuation (PMV) as a founder before approaching the investors.

You should know that certain terms and conditions may not adhere to the future growth of your company. In this case, it is advised to have a conversation regarding the same and eliminate it before finalising the deal. 

4. Protective Provisions

  • It is normal for the investors to have an set of over stipulated corporate activities
  • Some of these are less controversial, like a veto right on the declaration of dividends
  • The progress related to the assets are informed to the investors.

5. The Founder Vesting  

Founder vesting is an important factor that has to be present in the VC term sheet. While negotiating, the founder should make sure that the following things are clear.

  • The date on which vesting commences
  • Does vesting accelerate upon termination without cause
  • Do vesting accelerate upon a change of control or a termination of employment.

Hope this clears all your queries. If not, reach out to our team at Vakilsearch. Our experts will be getting in touch to resolve your doubts regarding VC term sheets.

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