How do you negotiate fair and transparent term sheets with your portfolio companies?

1 Know your goals

Before you enter the negotiation, you should have a clear idea of what you want to achieve and what you are willing to compromise on. You should also understand the goals and motivations of the founders and their expectations from you. For example, are they looking for more than just money, such as mentorship, connections, or strategic advice? Do they value control over their vision and culture, or are they open to sharing decision-making power with you? How do they plan to use the funds and what milestones do they aim to reach? Knowing your goals and their goals will help you find common ground and avoid unnecessary conflicts.

3 Be flexible and creative

Negotiating a term sheet is not a zero-sum game, where one party wins and the other loses. It's a collaborative process, where both parties try to create value and minimize risks. Therefore, you should be flexible and creative in finding solutions that work for both sides. For example, instead of insisting on a fixed valuation, you could use a valuation cap or a discount rate for convertible notes or SAFEs. Instead of demanding a high liquidation preference, you could offer a participating or non-participating preference with a cap or a multiple. Instead of imposing strict anti-dilution clauses, you could use weighted average or pay-to-play methods. The key is to balance your rights and returns with the founders' incentives and rewards.

4 Communicate clearly and honestly

One of the most common causes of disputes and misunderstandings in term sheet negotiations is poor communication. You should communicate clearly and honestly with the founders about your expectations, concerns, and feedback. You should also listen actively and respectfully to their views, questions, and objections. You should avoid using jargon, acronyms, or vague terms that could confuse or mislead the founders. You should also explain the rationale and implications of each term and how it affects both parties. By communicating clearly and honestly, you can build trust and rapport with the founders and foster a positive and productive relationship.

5 Seek professional advice

Finally, you should seek professional advice from lawyers, accountants, or other experts who can help you draft, review, and finalize the term sheet. They can also help you negotiate the finer details and resolve any legal or technical issues that may arise. You should also encourage the founders to seek their own professional advice, so that they can understand and agree to the terms without feeling pressured or exploited. Seeking professional advice will ensure that the term sheet is fair, transparent, and compliant with the relevant laws and regulations.