• How-to

Last time, we talked about the full partner pitch and how to go about it to pass muster. If all has gone well, the VC should now issue a term sheet to you. And if things have really gone well for you, then you would probably end up with more than a few term sheets in your hand.

Here, you may come across what you may desire or close to desire in terms of funding. But should you sign it without negotiating for better terms? No. Why? Because no VC will offer the deal best for you, but rather the deal best for him. Your job is to push him closer to your mark.

Compare to know
Earlier in the series, we had mapped out the process for you to get at least a few term sheets in your hands from different VCs. This immediately puts you in a bargaining position as now you have a tool to estimate your company’s worth with and also have the ability to walk away from any deal if you want.

Get a black coat
What I mean is, get a lawyer and a really good one. And not someone who also does your taxes and gets you out of drunk driving cases. Term sheets are fraught with legal language that is meant to make it too complex for an entrepreneur to look anywhere else but where the money shot is—the funding amount and associated terms. Get a good lawyer who has sat on both sides of the table.

When in doubt, focus
The term sheet has many terms and clauses. But in the end, the meat for the entrepreneur lies in only a few clauses. They must sound about right for you. For example, terms for board compensation, your rights, option pool and, importantly, your compensation. You must be comfortable with these terms. For the rest, have your lawyer look into them.

Check on the other side
Throughout the process of you hunting for funding, it has been the VCs who have checked on your venture and ran their processes on you in the need for diligence. Now, once you know the VC is interested in you, ask for references from them. For example, the CEOs they have worked with. The better VC will immediately hand you a list of all the CEOs they have worked with and ask you to call them. The shifty ones will give one or two, but will tell you when to call them.

Death-grip them
Never let the VC get away with anything that does not seem right to you. VCs think that they are working from a position of strength like a U.S.-Pakistan relationship and that their way of working is perfect. If the VC tries to pull a “This is how we do it” line for a term you do not see the right side of, urge them to give you a good reason why its there. If they aren’t talking, you aren’t signing.

This is the seventh of a multi-part series.

©Entrepreneur August 2010

Tags:
funding, How-to, term sheet, VC, venture capital