How to negotiate a term sheet?

A term sheet lays out the terms of the agreement that investors and founders need to discuss. It is the starting point of negotiations with an investor. Because the investor usually presents the term sheet first and has the experience negotiating hundreds of business deals, the initial draft of the term sheet will almost always favor the investor. After the all the terms in the term sheet have been agreed upon, the term sheet is used to create a legally binding contract.

Sometimes the terms of the business deal are more important than the valuation of the business. While several terms must negotiate in a term sheet, the most important items include: Valuation, Liquidation preference, composition of the board and vesting period for founders. Usually, it’s better to accept a slightly lower valuation for better overall terms. Investors may be protected, to some extent, by anti-dilution provisions but an entrepreneur may have no such provision.

The structure of the board along with the decisions a board can make have a significant impact on the management team. The decisions for which a founder may need board approval include budgets, financing, building strategic alliances, and so on. Additionally, the board has the power to fire the management team if required.

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