Lessons From a Term Sheet Competition

Trust Matters More Than Terms

Which one is the investor?

Yesterday I took part in the Startup Leadership Program’s (SLP) term sheet competition, where SLP Fellows negotiate terms of a hypothetical series A round with VC’s.

For those who are unfamiliar with SLP, it is one of the best founder programs that no one knows about. A hidden jewel with one of the strongest alumni networks I know of. I was a Fellow 6 years ago, as well as the other investors in the room… Just in Boston, Fellows have gone on to be VC’s at Bain Capital, Flagship Ventures, Siemens Ventures, Founder Collective, and Polaris Partners, as well as start a number of very successful startups such as RunKeeper, BostInno, Shareaholic, Price Intelligently, and countless others.

My big takeaway from the evening was how little the term sheet means without the context and relationship of the founding team and business. Relationship is everything, a few million here or there on a Series Seed or Series A valuations means little in the long run.

It also highlighted how few terms there really are to negotiate. Liquidation preference, at least in tech, is rarely employed beyond 1x participating preferred. Even that is becoming a bit of an old term.

Valuation, of course, is still a sticking point but I have rarely passed on a company I loved because we could not come to terms on the valuation (Perhaps I haven’t been investing long enough). Investors, in general, have an advantage in this negotiation because we have an intimate knowledge of market rates. We know what other, similar stage companies are getting and know that if you are overvaluing yourself, you will eventually be forced to come down.

As an investor in smaller deals, often taking less than a 15% stake in the company, pro rata rights are not always a given and a point we always try to fight for. These smaller investments also make it less likely that we will be taking a board seat but will often request observer status if we feel we can provide value or a board has yet to be established.

Establishing an employee option pool is a given. If you aren’t thinking about bringing in and retaining talent then we probably haven’t gotten to the stage where a term sheet is being presented.

Which brings me back to my broader point. By the time we get to the term sheet stage, I have a sense of your perceived value and am willing to make it work within those parameters. My goal is to keep it as simple as humanly possible so that the company can focus on growing their business and making themselves as attractive as possible to the next stage of investors. Funky terms hurt us both.