The first term sheet I ever negotiated took just forty minutes in elapsed time to negotiate.
The longest a term sheet took to negotiate that I’ve been involved with was ten months. And the investor was the same investor in both cases. It’s a true story.
How can it take you between 40 minutes and 10 months to negotiate a term sheet?
The answer in both cases is “Raul”, one of our investors, held all the cards in each negotiation.
“There is no negotiation,” Raul said to me when I called him in Hawaii to negotiate the term sheet he had given us the day before. That didn’t keep me from trying to negotiate which I did for fifteen minutes.
Eventually Raul got tired listening to me try to negotiate, so he said to me, “I believe this term sheet explodes like a pumpkin at 5 PM. Here’s my number. Call me before then if you’re interested in accepting my terms.”
Then the line went dead.
Top tip number one for negotiating a term sheet: Have your advisors lined up before you negotiate.
I only had 25 minutes to get back to Raul, and I certainly didn’t want to tempt fate by calling him back after 5 PM. I told Dave (my advisor) and Gill (my other investor) that I had received Raul’s term sheet, and I made sure they were available when I called Raul.
So I called Dave and Gill, and I told them what Raul said, and I asked them what I should do. Dave and Gill said the exact same thing: “Yes, the terms suck, but you don’t have any other choice, so you should take the deal.”
This leads to the most important tip for negotiating a term sheet if you want to get the best deal…
Top tip number two for negotiating a term sheet: You can only really successfully negotiate if you have multiple investors competing against each other.
Of all my regrets I wish we had investors competing over us. But we were raising money for a company in a market that investors were less and less interested in investing in. I was just happy we had one group of investors.
Two groups of investors fighting over us would have been nirvana. Wonderful things happen when you have options. You can, within reason, negotiate a better price and better terms.
However, the most important thing you have when you have multiple investors competing over you is just that. You have a choice of investors.
Here’s my advice. More important than the best terms or the best valuation is choosing the investor you feel the best about. Which investor is the most aligned with your vision? Which investor do you want to work with for the next seven to ten years?
By the way, the investor you’re the most aligned with is the investor that most likely to give you the best terms. It’s funny how that works out.
Top tip number three for negotiating a term sheet: Make sure you have a good startup attorney lined up.
If you’re going to raise money, then you want a good attorney lined up before you start. It’s worth every penny your attorney because your attorney will keep you out of trouble.
Our attorney, Marcia, had negotiated tons of term sheets, so she knew exactly what to look for. You want someone like Marcia helping you with the term sheet. More importantly, you need a good attorney to help you with the closing documents that will follow the term sheet.
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