Once you have received your term sheets, you should work with your Ithaca expert to identify the most important terms and focus on those. Term sheets are not binding, but they will form the foundation for the binding legal documentation ahead of an investment.
You are not just negotiating for better terms, but also building credibility with the investor. If you accept the term sheet without considering it properly or, inversely, argue every point without strong rationales, you’re creating a negative image for yourself and your team going forward.
Be willing to stand up for the important issues — and show that you know what the most critical issues are for you. Then, the investor will understand what is important to you and will respect you for trying to strike a good and fair deal.
Although an investor term sheet is non-binding in many respects, it may be filled with unfamiliar terms that require definition because this document will form the basis of your investor agreements going forward. An Ithaca specialist can help you navigate the technical aspects, allowing you to focus on the most important elements to negotiate.
The 'best' term sheet will not always be the one that values your business the highest, and therefore the least dilutive. It is important to assess each term sheet holistically, reflecting on the other conditions highlighted in the document. Remember that a successful investor partnership will last over the long term and that their help will be invaluable in future financing rounds - picking a trustworthy investor, with a strong reputation, can be a fantastic move for your business.
Some important items to consider:
A function of the amount raised and the estimated value of your business. Business valuation is as much an art as a science - you need to be confident in your view of what your business is worth and to be prepared if those you are speaking to disagree.
An investor negotiation is as much about compromise and mutual understanding as anything else.
The round size is, in essence, a function of (1) the ambitiousness of your plan (2) the investor's confidence in your ability to deliver it. It is helpful to bear this facts in mind and prepare points of evidence to demonstrate your ability to deliver your plan to investors.
This defines the return an investor receives when you sell your company and can significantly impact your own proceeds from the business. Take the time to model various anticipated exit values to understand the actual dollar differences between liquidation preference options.
A time period during which you cannot solicit new investors and need to suspend conversations with existing investors. The length of this period is up for negotiations. A protracted exclusivity period could harm the process and your chances of success.
These can be reasonable and help protect VCs. In some cases, the valuation might have been lower in absence of these provisions. However, in some cases the provisions can be too onerous on the founders and this is something to look out for.
These are rights that investors have to curtail certain corporate actions. Make sure that you are fine with these and if not, negotiate to change the provisions or have them removed.
In order to be in a strong negotiating position, you should be aiming to receive term sheets from multiple investors simultaneously. This will create competitive tension and allow you to push for more favourable terms.
You should also try to enter into exclusivity with a fund only once you have tested their interest thoroughly and have a comfortable degree of confidence that they will "come through". Try also to avoid excessively long exclusivity periods, which might cause other investors to lose interest in the deal.
If you have a compelling business case and are confident in your vision, that is a good starting point. Remember that the investor's reputation is also on the line during negotiations and that credible investors will be interested in a fair, reasonable negotiation.
Having a structured process with multiple simultaneous term sheets and being proactive in negotiations can make the whole difference not only in making the deal happen, but also in getting the best possible terms. An Ithaca expert can help you devise a highly competitive process and ensure that you put your best foot forward during negotiations!