The VC Fundraising Process: Negotiation of Term Sheets

Thumbs up or down?If you’re following along with our series of posts on the venture capital fundraising process, the next step in the process is the negotiation of deal terms.

The process by which negotiations happen is determined by several factors, including how badly the company needs the money, how many term sheets have been received and what other alternatives are available. If there is more than one term sheet, you can play hard ball—with the caveat that you still will need to work with the investors after the transaction is closed. There is a fine line between negotiating hard and being antagonistic. Keeping things respectful is important. This is an area where having a banker help lead the negotiation can preserve the relationship with the investors while still pushing hard for the best possible deal.

A company that already has money in the bank is obviously better positioned in a negotiation than a company without money. Companies that are raising money to increase their war chests for acquisitions, product expansion or to prepare for an M&A event have more leverage than companies that need the money to survive.

Often companies will need more money than one VC can provide either in the present round or at least later in the development cycle. It’s essential to build an investor syndicate to make sure there is enough money around the table when the time inevitably comes to raise more capital. Not having enough money from current investors for future, larger rounds can be a major mistake. It can also prove the downfall of otherwise successful companies.

Finding other VCs that the lead investor and CEO can work with is important and a collaborative process. By this point, presumably all economics for the transaction have been agreed upon and the signed term sheet can be “shopped” to fill out the round.

Attorneys should be involved in the term sheet negotiation but not around business issues, unless they have a particular perspective.  The company must decide on these items.

Syndicates are often constructed by the lead investor, not the company.  That being said, companies can veto investors that they do not believe they can successful work with.