From term sheet to final deal: How the process works with VCs

Founders Supporting Founders: Iterative is accepting applications for its next batch of founders. Funding is the least important thing it does for you.

Photo credit: Kelly Sikkema.

This is a five-part series by the author and his team at Point Nine Capital.

Here’s the outline for our series:

• Part 1: Before working with VCs
• Part 2: Preparing your fundraising
• Part 3: First contact and assessment phase
• Part 4: From term sheet to signed deal
• Part 5: Post-investment

The 2-minute TL;DR video

Now that VCs have explicitly shown interest in investing in your company, it’s time to agree with them on the specific terms and conditions of the deal. This phase is very technical, and you’ll be working closely with your lawyer to structure it.

Before signing the final agreement, you’ll progress through different steps—from negotiating the term sheet, going through due diligence, to negotiating the terms of the final contract. The length of the overall process depends on each case and how complex the deal is.

Term sheet

If a VC wants to invest in your company after the assessment phase, he will first send you a term sheet.

Term sheet negotiation

In this post, I won’t tell you how to read or negotiate a term sheet since it’s a very technical topic. The best way not to fuck up is to do it together with a trusted and experienced lawyer. You should also request the help of other founders who have been through this experience.

For those who don’t know, a term sheet is a “non-binding document meant to record two or more parties’ intentions to enter into a future agreement based on specified (but incomplete or preliminary) terms.” This is the document which lays the foundation for the future terms and conditions that will appear in the final contract. In it, you’ll generally find the amount the VC wants to invest, the valuation of your company for this round, and the types of shares they will get.

Deal finalization