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How do you get a fair term sheet with investors?

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Getting a fair term sheet with investors is a crucial step for any startup founder who wants to raise capital and grow their business. A term sheet is a document that outlines the key terms and conditions of a potential investment deal, such as valuation, equity, voting rights, liquidation preferences, and more. However, not all term sheets are created equal, and some may contain clauses that favor the investors over the founders or create conflicts of interest down the road. How can you negotiate a term sheet that reflects your vision, protects your interests, and aligns with your investors? Here are some tips to help you get a fair term sheet with investors.

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由社区从 4 条内容中精选。了解更多

Aditya Singha

MBA candidate (INSEAD) | Lawyer | Startup; VC, PE | M&A | Strategic Partnerships | Mediator
Belinda Wong

Author, Director of Leader Corporate Services Limited and Advisory Board Member of Unify21.com
Ahmad Ahmadi

Professor of Law, Arbitrator

1 Know your worth

Before you enter any negotiation, you need to have a clear idea of what your startup is worth and how much you are willing to give up in exchange for funding. You can use various methods to estimate your valuation, such as market size, traction, revenue, growth potential, and comparable deals. However, valuation is not an exact science, and it can vary depending on the stage, sector, and market conditions of your startup. You also need to consider how much dilution you are comfortable with, and how much control you want to retain over your company. Having a realistic and confident valuation will help you set the boundaries and expectations for your negotiation.

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Ahmad Ahmadi

Professor of Law, Arbitrator
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In my recent experiences,I realized that most of young startup team members had this feeling!They usually did not thoroughly evaluate their worth.

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2 Understand the terms

A term sheet can contain dozens of terms and provisions that can have a significant impact on your startup's future. It is important to familiarize yourself with these terms and understand how they affect your rights, obligations, and incentives as a founder. Equity, voting rights, liquidation preferences, anti-dilution, and vesting are some of the most important ones to consider. Equity refers to the percentage of ownership that the investors will receive in exchange for their investment, while voting rights are the rights that the investors have to influence the decisions and direction of the company. Liquidation preferences determine the order and amount that the investors will get paid in the event of a sale, merger, or dissolution of the company. Anti-dilution is the protection that the investors have against the dilution of their ownership in future rounds of funding. Lastly, vesting includes a schedule and conditions that founders and employees have to meet to earn their equity. It is recommended to consult with a lawyer or an advisor who can help you review and interpret the term sheet.

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3 Compare and contrast

One of the best ways to get a fair term sheet is to have multiple options and leverage them to your advantage. You should try to generate interest and competition among different investors, and compare and contrast their offers. You can use platforms like AngelList, Crunchbase, or PitchBook to research and identify potential investors who match your criteria, such as industry, stage, geography, and portfolio. You can also network and get referrals from other founders, mentors, or accelerators. Having multiple term sheets will allow you to negotiate from a position of strength, and choose the best fit for your startup.

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Ben Boissevain

M&A, Capital Raises, Valuation, AI, Data, Analytics, DevOps, AIOps, Cybersecurity, Telecom, MarTech, PropTech, FinTech, HealthTech, IoT, Cloud, eCommerce, SaaS, IT Services, and Enterprise Software.
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The best way to get a fair term sheet is to have multiple offers at the same time. Timing is the key. Coordinate the process so interested investors need to submit offers on a date certain. Creating a sense of urgency with an offer date will generate the highest valuation.

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4 Communicate and collaborate

Negotiating a term sheet is not a zero-sum game, where one party wins and the other loses. It is a collaborative process, where both parties aim to reach a mutually beneficial agreement that aligns their interests and goals. You should communicate clearly and respectfully with your investors, and understand their perspective and motivations. You should also be transparent and honest about your expectations and concerns, and address any issues or questions that arise. You should avoid being too aggressive or defensive, and focus on creating value and trust. You should also be flexible and willing to compromise on some terms, as long as they do not jeopardize your vision or values.

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5 Finalize and celebrate

Once you have reached a satisfactory term sheet with your investors, you should finalize and sign it as soon as possible. A term sheet is not a legally binding contract, but it is a sign of commitment and goodwill. You should not delay or back out of the deal, unless there are significant changes or problems that arise during the due diligence or closing process. You should also not solicit or accept any other offers, unless you have a valid reason and inform your investors. You should also celebrate and thank your investors for their support and partnership, and prepare for the next phase of your startup journey.

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Belinda Wong

Author, Director of Leader Corporate Services Limited and Advisory Board Member of Unify21.com
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Negotiations between the founders and investors are never easy. Each side wishes to have the best of terms. For founders, they should be pretty clear what they need to sustain their businesses. They should consider accepting the terms offered by the investors to keep their businesses going. For investors, they should focus on the benefits of having the businesses in their investment portfolio and work out the maximum amounts they could offer to the founders. With these in mind for both sides, a deal could be easier to make. Fairness, in most circumstances, does not exist.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Aditya Singha

MBA candidate (INSEAD) | Lawyer | Startup; VC, PE | M&A | Strategic Partnerships | Mediator
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Do not settle for unfair terms purely because the investor suggests that the terms are 'market standard' because the market itself is fluid and there is no absolute or clear standard. Know your worth and if needed, hire a professional advisor or corporate lawyer to guide you through the ramifications of some terms. I have seen how some term sheets carry favourable commercial terms but onerous operational and governance terms which the startup ignores and later regrets.

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How do you get a fair term sheet with investors?

1

2

3

4

5

6

1 Know your worth

2 Understand the terms

3 Compare and contrast

4 Communicate and collaborate

5 Finalize and celebrate

6 Here’s what else to consider

Startup Development

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How do you get a fair term sheet with investors?

1

2

3

4

5

6

1 Know your worth

2 Understand the terms

3 Compare and contrast

4 Communicate and collaborate

5 Finalize and celebrate

6 Here’s what else to consider

Startup Development

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