What are the best practices for negotiating term sheets and deal structures?

1 Know your goals and priorities

Before you enter a negotiation, you should have a clear idea of what you want to achieve and what you are willing to compromise on. For example, are you more concerned about valuation, dilution, board seats, or veto rights? How much risk and uncertainty are you willing to accept? What are your alternatives and fallback options? Knowing your goals and priorities will help you focus on the most important issues and avoid getting distracted by minor details.

2 Understand the other party's perspective

Negotiating term sheets and deal structures is not a zero-sum game. Both parties have their own interests, motivations, and constraints. To reach a win-win solution, you should try to understand the other party's perspective and empathize with their concerns. For example, why are they offering or asking for certain terms and conditions? What are their assumptions and expectations? What are their pain points and deal-breakers? Understanding the other party's perspective will help you communicate more effectively and find common ground.

3 Be flexible and creative

Negotiating term sheets and deal structures is not a one-size-fits-all process. There is no standard or optimal formula that works for every situation. Depending on the stage, sector, market, and dynamics of the deal, you may need to adapt and customize your approach. For example, you may need to adjust the valuation based on the traction, growth, and potential of the business. You may need to use different types of securities, such as preferred stock, debt, or SAFE agreements, to balance the risk and reward of the investment. You may need to negotiate various terms and conditions, such as liquidation preferences, anti-dilution clauses, or drag-along rights, to protect your interests and align the incentives of the parties. Being flexible and creative will help you overcome challenges and create value.

4 Be transparent and respectful

Negotiating term sheets and deal structures is not a game of deception or manipulation. It is a process of building trust and rapport between the parties. To achieve a successful outcome, you should be transparent and respectful in your communication and behavior. For example, you should share relevant information and data, disclose any issues or risks, and explain your rationale and logic. You should also listen actively, acknowledge the other party's views, and avoid aggressive or defensive tactics. Being transparent and respectful will help you establish credibility and goodwill.

5 Seek expert advice and feedback

Negotiating term sheets and deal structures is not a solo endeavor. It is a collaborative effort that involves multiple stakeholders and experts. To ensure that you are making informed and sound decisions, you should seek expert advice and feedback from your advisors, mentors, lawyers, accountants, and peers. For example, you should consult your advisors and mentors on the strategy and tactics of the negotiation, your lawyers and accountants on the legal and financial implications of the deal, and your peers on the market standards and best practices. Seeking expert advice and feedback will help you avoid mistakes and pitfalls.

6 Review and finalize the documents

Negotiating term sheets and deal structures is not the end of the deal. It is the beginning of a long-term relationship between the parties. To ensure that the deal is executed smoothly and accurately, you should review and finalize the documents carefully and thoroughly. For example, you should check that the term sheet and the deal structure reflect the agreed terms and conditions, that there are no errors or inconsistencies, and that there are no hidden or unfavorable clauses. You should also prepare for the due diligence process, the closing process, and the post-investment relationship. Reviewing and finalizing the documents will help you seal the deal and start the partnership on the right foot.