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Salonie Ganju · · 7 min readNegotiating a term sheet with your investor can be hard. Here’s what to look out for
This article is from an episode of Matrix Moments by Matrix Partners India, a podcast featuring candid conversations on what it really takes to survive the startup world. This is heavily revised from the original show transcript. For the full interview, go here.
In this episode, Matrix Partners India’s Avnish Bajaj dives deep into the significance of different terms within a term sheet, the details that founders should focus on, and some guidelines for those who are working on one for the first time.
Significance of a term sheet
A term sheet defines the rules of engagement. It defines what the shareholders’ agreement (SHA) is going to look like.
I’ve seen very large amounts promised on single-page term sheets. To be fair, it’s fine if the SHA mimics that simplicity, but it never happens. An SHA may then include 50 other terms, which is a surprise to some of the parties involved.
So the more detailed a term sheet is upfront, the better.
There’s also a global trend of investors having to be founder-friendly, which means they have to compromise on a lot of key terms. But I think this is teaching founders the wrong things. Terms matter; this is business.
A term sheet should not be founder-friendly, it should not be investor-friendly. It should be neutral.
The key terms
Before getting into the key terms, let me just share one piece of advice for founders: Please get a lawyer.
Sure, you can Google “how to do a term sheet” – I did it when I was running my own startup Baazee – but I just think it’s a bad idea.
Get a lawyer who has experience with these kinds of deals. If you are looking to raise from a venture capitalist, then look for someone who has done VC deals before, as it’s not the same as private equity.
Pre-money vs. post-money valuation
I don’t think some founders realize that once they raise money, their multiple is automatically post-money.
For example, a startup valued at US$2 million may raise money at a US$25 million pre-money valuation, despite the fact that they’ve already banked US$10 million previously. The founders will then say they’re raising at 12x. That’s crazy high.
Knowing this is important because in my view, a founder’s responsibility is to generate value for investors. It’s great to optimize valuation now, but they’re ultimately not making money out of it. They’ll only make money when they exit.
Liquidation preference
Should angel investors get these rights?
Exit provisions
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