Congratulations, you are now at a point in the process when investors will be making formal offers to invest in your company.
Investment proposal details will be provided in a document commonly referred to as a term sheet. Term sheets are legal documents that deserve serious attention. And, as is the case with most legal documents, the term sheet will include language that you are unfamiliar with. If you want to dive in and learn about any of the specifics, there are many books on the topic. We recommend reading Venture Deals by Brad Feld.
The best advice we can give you as a founder when it comes to evaluating term sheets is to make sure you have an excellent attorney who is deeply familiar with the current market dynamics. Ideally, this is the same attorney who incorporated your company and has agreed to defer all payment until after you’ve closed your funding round. If you need a recommendation, we suggest:
As a founder, pay special attention to these key terms:
Looking for a quick explanation of the key terms or mechanics of cap tables? Reference Founders Workbench’s Deal Dictionary.
If you are fortunate enough to have more than one quality option, be grateful for your “champagne problems.” Clearly, you did a great job telling a compelling story, and investors appreciate your insight and skill set.
Know that nearly 100% of term sheets are negotiated, so expect to have at least a few discussions with your potential investors regarding the key terms. Use your attorney to manage the back and forth on the minutiae, as they can do so with more objectivity and less emotion.
Be wary of exploding offers (expiring term sheets). Allowing an investor to invest in your company is a big decision, and once that decision is made, it is nearly impossible to unwind. Having to make a decision with a gun to your head is the wrong way to start off such an important relationship.
Founders frequently ask, “How much time do I have to respond?” There is really no hard and fast rule. Most term sheet negotiations work themselves out in two to four days.
When in doubt, follow the Golden Rule. Ask yourself how you would want to be treated if the situation were reversed. This is a relationship that is going to be core to you and your company, so manage it appropriately. It is absolutely acceptable (and expected) that you will take a few days to complete your process with other investors and any unfinished references. It is fine to tell investors you have other term sheets, but do not disclose any of the terms. Be direct about when and how you will make your decision.
We highly recommend investing time and energy into checking references with founders who have worked with the firm, particularly the partner you will work with most frequently. Investors will often provide founder references. Take the opportunity to speak with these founders, but reach out to others directly as well. In the world of LinkedIn connectivity, there’s no reason not to do some additional reference checking.
Ask founders for specific examples of how the partner and firm were helpful with building the company. Double-click on who it was, specifically, who did the work. Many VCs take credit for successes they had little to do with. A good way to find out this information is to speak with references where the outcome wasn’t a great success. Don’t be timid about finding out how the investor behaved during the tough times, because it’s easy to be a good partner when everything is rosy.
Finally, it might be tempting, but don’t just fall in love with the firm brand. You’ll likely end up interacting primarily with one or two people from that firm, so ask yourself if they have the energy and capacity to be committed to your success. How much will it matter to them if your company succeeds or not? Do they have competitive investments? How many boards are they on? Make sure they will be a complementary addition to your existing board if you have one.
Bottom line: optimize for the partner you believe you will work best with for the long haul.
Fundraising can be a wild, but rewarding process. Embrace it as an opportunity to learn and improve. To build your dream business, you’ll need to execute the fundraising process successfully multiple times. Start by setting clear goals for your company at every stage, understand investor priorities, and be deliberate about the investors you engage with.
Practice your pitch and make sure it is an authentic, compelling story. As a founder or CEO, your number one job is to create and describe an investment opportunity that an investor can’t pass up.
And when it comes time to decide who to take investment from, check references and partner with someone who engages the way you want and provides the support that maximizes your odds of success. Have confidence and remember to enjoy the ride!
We sincerely hope you found this fundraising module valuable. For more startup tools, follow us on Linkedin and X.
Fundraising
