Negotiate terms at the term sheet stage


I've been involved in a few deals now (selling my last company, angel rounds, things involving my portfolio & advisor companies, partnerships, etc.). I've seen a pattern that I hope I can convince you to avoid. Here it is:

  • You get a term sheet, and like some of what you see, e.g. price.
  • For lots of possible reasons (don't want it to go away, pressure, excitement, lack of understanding, etc.) you sign the term sheet to get to the next stage.
  • You then get the draft deal docs based on the term sheet.
  • You start reading through them and consult with your lawyer and see a lot of scary stuff.
  • Some of that stuff was actually in the original term sheet at a high level.
  • You start pushing back on these terms that you don't like.

There are a two main problems with this scenario, from your perspective...

  1. You'll usually end up worse off than if you negotiated the term sheet properly. The problem is you'll get serious push back of the form "you already agreed to that in term sheet." Yes, things are probably still negotiable, but you've lost a lot of your positioning, and frankly, they make a good point. So you'll probably be more likely to get stuck with things you don't like.

  2. You're significantly lowering the probability of closing. Each term in a term sheet gives and takes off of others. So when you try to clean it up after the fact, you're really asking the other side to go back to the term sheet stage and put everything else back on the table. Again, this is doable, but it puts the deal in reverse, and that is never good. You want to maintain momentum.

Luckily, this is an easy issue to resolve. First, don't rush into anything. If you have a term sheet, you certainly have enough time to reasonably understand it and go over it with your lawyers. 

Second, make sure you understand every point in there. For VC/angel stuff, start here. And finally, negotiate. A lot of stuff in there is probably changeable, so figure out what is important to you and push for the deal you want.

After the term sheet stage, I can guarantee you there will be more negotiation on the details, so it really makes sense to really get agreement on the high level stuff.


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