How do you manage founder pushback on investor protective provisions in a term sheet negotiation?

To complement understanding founder concerns and educating them, it's crucial to address the underlying reasons behind their resistance. This could involve delving deeper into their concerns about control, ownership, or the potential impact on the company's culture. By actively listening to their concerns and addressing them transparently, you can build trust and foster a more collaborative negotiation process.

Founders are probably right to push back on "investor protective provisions" in a term sheet. There are some really basic standard ones like in a SAFE. But most of the "protective provisions" that people talk about in term sheets are ways for investors to not lose too badly if the company struggles, at the expense of the founders. That seems backwards. Investors are aware of the risks and are willing to back a startup because of the potential upside, and it's part of a diversified portfolio. The founders are taking MUCH more risk than investors. Returns in venture come from the upside, not "managing downside risk."

You don't. It's your money they need it more than you need their deal. Set out your terms back up your positions with fact and be prepared to say no their demands and walk out. That's one of the problems in business today people think they need to make everyone happy and like them.

Take the time to listen and understand the specific concerns the founders have regarding the investor protective provisions. Founders may worry about losing control, feeling that their vision might be compromised, or fearing that too many restrictions could hinder their decision-making. By genuinely understanding their perspective, you can address their worries more effectively and find common ground that respects both parties' interests.

I guess first things first, one needs to understand the founder's perspective. Founders often view protective provisions by investors as overly restrictive and an infringement on their control over the company. Acknowledge their concerns and try to find a middle ground, so that no one sounds / act overwhelming and no one feels overwhelmed.

I often find myself in this situation: founders push back against certain terms, which are often non-negotiable. However, instead of adopting an aggressive take-it-or-leave-it tone, I take the time to explain the reasoning behind the clause and what it aims to achieve. I explain these terms in detail, emphasizing that they are designed not to hinder the company but to protect our downside or reward early risk-taking. Almost always, the founders end up accepting the terms, but more importantly, they appreciate the transparency. Of course, VCs should also leave some room for compromise whenever possible.

Ensure that founders are fully informed about the rationale behind the investor protective provisions. Explain how these provisions protect not only the investors but also the long-term health and sustainability of the company. Use real-life examples and case studies to illustrate how these provisions have positively impacted other startups. By providing a clear and transparent explanation, you can help founders see the value and necessity of such protections.

Explain that even with strict protective provisions the day to day control of the company remains largely with the founders.

Most of the times, the founders are seeking the rationale before making up their mind and going ahead. We need to walk the founders through the purpose of each protective provision and how it helps protect the investors' interests without hurting the Founder's. You could emphasise that these are standard terms that investors expect regularly these days and are a part of similar, successful deals.

Show willingness to negotiate and find a middle ground that satisfies both the investors' need for protection and the founders' desire for autonomy. This might involve adjusting certain provisions to be less restrictive, setting specific milestones that could lead to a relaxation of some terms, or including clauses that ensure founder involvement in key decisions. Demonstrating flexibility can build goodwill and foster a more collaborative negotiation process.

Other concessions can be having a pre money valuation threshold for veto rights on future fundraising and M&A transactions and freeing a certain percentage of the founders holdings, on a yearly basis, from the no sale limitation.

Every contract is a give and take, some bargaining is inevitably involved. Therefore, you need to be flexible, accommodative and willing to compromise on certain provisions or find new, alternative, out of the box solutions that address the investors' core concerns, without giving too much and yet satisfying the investor. The key is to find the right balance.

Establishing a foundation of trust is crucial in any negotiation. Engage in open and honest communication, and ensure that your actions consistently align with your words. Share your long-term vision for the company and how the investor's support and protective provisions align with achieving mutual success. Building a trusting relationship can ease tensions and lead to more productive negotiations, ultimately resulting in a term sheet that both parties feel comfortable signing.

? Trust is essential in investor-founder relationships. ? Consistency and reliability build trust over time. ? Share success stories of supporting other portfolio companies. ? Explain how protective provisions have worked in practice. ? When founders see you have their best interests at heart, pushback reduces. Statistics show 80% of founders are more likely to accept terms from trusted investors. Building this trust is key for long-term success.

Focus and sell the big picture to all concerned. Remind the founders that the overall term sheet, including the valuation, investment amount, timing of investment, distribution of control, etc. represents a fair deal that will benefit the investee company's growth. Encourage a long term vision. The protective provisions are just one piece of the negotiation, whereas the Founder should be more concerned about inclusive, long-term, mutually beneficial growth.

Manifest your fairness. Point out other founder-friendly aspects of the term sheet, e.g., vesting schedules, option pools, or board composition, to show that the investors are balancing various interests and the Founder does not have a overall downside. Try to sell a win-win narrative.