What to look for in a term sheet as a first-time founder TechCrunch
Obtaining finance is a stressful task effort, but it is not necessary. We recently sat down with three VCs to figure out the best way to build an investment network from scratch and negotiate the first term sheet.
Earlier this week, we featured the first part of this conversation with James Norman of Black Operator Ventures, Mandela Schumacher-Hodge Dixon of AllRaise, and Kevin Liu of Techstars and Uncharted Ventures.
In Part 2, Investors covers more details on what to ask for in a term sheet and the red flags you need to watch out for.
(Editor’s note: This interview has been lightly edited for length and clarity.)
Why should you know what is going to be in a condition sheet before you see it?
Mandela Schumacher-Hodge Dixon: Don’t wait to have a condition sheet to start going back and forth. The term sheet should reflect what has already been verbally agreed, including the valuation. Don’t wait until you have that legal agreement in your inbox to start pushing back, because it’s really annoying and it’s starting to affect what they think of you.
I’ve even seen investors pull the term sheet. No one is bulletproof, but you really want to be as bulletproof as possible every step of the way. It takes preparation and clear communication.
James Norman:As you plan your entire fundraising process, lean into it, and start to see what the market is thinking, you want to have an idea of what you’re willing to accept. At some point you may have to capitulate, but be convinced to [that bottom line] and have a reasoning for it.
VCs try to invest in leaders, so they know there’s going to be a power dynamic here. How do you handle this and get things done [impacts] how they think you’re going to do other things like hire employees and land clients.
Which mechanism is best to use initially?
Norman: Once you get the condition sheet, the game really begins.
When it comes to terms, you want to make sure you’re getting a deal that’s on par with the level you’re at with your business. You don’t want to end up with an angel investor trying to give you preferred Series A documents or anything of that nature.
If you have a pre-seed or early-stage startup, 99% of the time you should be using a SAFE (a simple agreement for future equity that Y Combinator devised in 2013). It contains all the standard language you need; no one can contradict him. [If they do] be like, “Go talk to Y Combinator about it.”