The Art Of Negotiating A Good Term Sheet

When you receive a term sheet for a full term stock funding, it is important to understand every aspect of the term sheet. It can be daunting to understand the different terms and conditions involved in the funding process. So before you get a complete term sheet agreement, here are a few facts you could look at and understand.

1. Understand your leverage 

One of the most attractive variables in any negotiation is to understand the number of variables available. The more investors you have interested in your company, the more leverage you can hold over the investor you are more inclined towards. Always understand and work with the leverages at hand.

2. The makeup of the board of directors 

The makeup of the Board of Directors and governance of the Company going forward is very important.  A typical arrangement following an initial equity financing would be a three person board with one investor representative and two founders as representatives of the common stock. This ensures that your interests, as well as your investors interests, are met with equal representation.

3. Exclusivity 

Make sure to always include the exclusivity clause while negotiating your term sheet. When you do this, you ensure that the contract you have with your investors is binding and confidential. By doing this, you and your investors cover all your assets.

4. Focus on value 

More often than not, when you focus on the end result, you lose out on the bigger picture. This is why when you look at your term sheet, make sure you focus on the long term value of the relationship and not the short term goal.  To maximize valuation without regard for nonfinancial considerations is like signing a baseless term sheet.

5. Add a liquidation preference 

More often than not, investor relationships reach a sour note. It becomes hard to have a proper balance when it comes to this point. The liquidation preference defines the return that an investor receives in a sale of the company, and it can have a significant impact on the founder’s return.  Be sure to model out expected exit values so you can know where you stand once the deal doesn’t work.

In every new relationship, it is easy to get carried away by the prospective offerings. Make sure you figure out what works for you and what doesn’t. Negotiate a term sheet which has both your interests at heart and ensures a fair role share.