How do you align your VC investment strategy with your term sheets?

I would like to add additional points based on my experience in negotiating terms sheets for multiple VCs: ? Signalling: A term sheet from a reputable investor attracts more investors. ? Due Diligence: Investors examine the startup thoroughly after signing the term sheet and before finalizing contracts. ? Exclusivity: Term sheets often have clauses preventing startups from seeking other offers temporarily. ? Legal Fees: Startups should budget for the legal costs of drafting term sheets and final contracts.

If you look at VCs like Sequoia Capital, they are known for investing in high-growth tech startups. Their term sheets align with this strategy, helping the VC and startups be on the same page. In my experience, i have observed the following: ? If a VC firm's term sheet and strategy are aligned, and it has a history of successful exits, this can boost its reputation, making it easier to attract high-quality deals in the future. ? Misalignment can result in legal disputes and harm the VC firm's reputation. ? Proper alignment helps close deals faster by reducing the need for extended negotiations.

Term sheets should be flexible, allowing for revisions as the startup grows or changes direction. They should also outline the exit strategy, such as an acquisition or IPO, which is especially important for VC firms. Incorporating performance milestones can also trigger additional funding or better terms for the startup. ? Flexibility is Key: Term sheets must adapt to a startup's scaling or pivoting. ? Exit Strategy: This is crucial for venture capitalists aiming for a profitable exit. ? Culture & Involvement: While not on paper, aligning company cultures and specifying how hands-on an investor will be can make a big difference in the long run. ? Performance Milestones: These can be used to unlock additional funding or better terms.

One of the important points in investment contracts is to determine the KPI suitable for the investment stage. Because these KPIs determine the startup's focus point. For example, in the seed stage, indicators such as retention, NPS, and virality can be appropriate, and in the growth stage, indicators such as active user, lifetime, CAC can be appropriate. Determining the right indicators is one of the most important parts of alignment.

In my experience of drafting term sheets, the other points that add value include the following: ? Due Diligence: Early-stage startups focus on vetting the team and idea, while later stages dive deeper into financials and metrics. ? Risk vs. Reward: Earlier stages have higher risk and potential returns; later stages are lower. ? Liquidation Preferences: Later stages often include complex terms to protect the investor's downside. ? Investor Rights: Later-stage deals usually have more detailed investor rights like board seats and voting. ? Investor Syndicates: In later-stage investments, you often find a syndicate of investors, which requires different alignment and coordination.

Suppose i take the example of a biotech firm like Moderna. In that case, the firm faces sector-specific challenges like high entry barriers and long R&D cycles that require patient investment against a fintech company like Stripe, which has low entry barriers and investments. In addition, the other points that we must take into account include: ? Scalability varies by sector; it is faster in SaaS and slower in hardware. ? Consider the sector's total market and growth rate. ? Be aware of potential regulatory changes affecting your sector. ? Understand sector sensitivity to economic ups and downs. ? Exit strategies depend on the sector, e.g., IPOs for tech and acquisitions for manufacturing.

Let us take a company like SpaceX, which has utilized convertible notes and preferred equity. For an investor, the following happens: ? Exit Impact: Investment type affects payouts in exits like IPOs or acquisitions. ? Due Diligence: Preferred equity often needs more legal checks, increasing costs. ? Follow-on Rights: Convertible notes may have pro-rata rights for future investment. ? Timing: Convertible notes are usually faster to process than preferred equity. ? Taxation: Different tax treatment for dividends and interest. Thus, ? Understand your investment's structure and its pros and cons. ? Know that terms are negotiable. ? Be aware of added complexities like exit rights and taxes. ? Consider the speed of deal closure.