Term Sheet Negotiation Tells

I recently negotiated and signed a term sheet with a company I am very excited about working with. I’ll talk about that company later but for now wanted to talk about the process.

Now that I have been a venture capitalist for over five years I’m able to recognize more patterns and one is around term sheet negotiation. This last negotiation was a breeze. The founders were tough, but they knew what was important to them. I also know what is important to me and we were able to have a set of frank, open, and friendly conversations about it and we were able to sign inside of 48 hours.

In my experience this is likely to mean that my experience with these founders will be similar. We’ll likely have frank and open discussions around the issues in the business but always be able to work together in a friendly way to get to a positive conclusion. I’m excited.

I’ve had a few term sheet negotiations that have been less than satisfying. They took forever to get closed, if ever, and we spent as much time on the nits as on the substantive issues. One founder wanted to negotiate out of having to pay $10K in lawyer fees. Said just because it was always done that way doesn’t mean we had to do it that way this time. Turns out that person wanted to rewrite the book of convention on every decision he made. I can’t tell you that’s why his company failed but it sure didn’t help. Another person didn’t want preferred shareholders to have any preferred rights. He never should have taken investor money and probably won’t again. My favorite was the guy who wanted a relocation bonus….to move his boat to the bay area. Not a boat he lived on, mind you, but one that he sailed occasionally. That term sheet was never signed and it was probably best for both of us.

This doesn’t go one way, either. The investor who spends hours browbeating you to avoid a tiny reduction in the option pool will also be tying up board meetings for an hour to talk about an assumption on line 18 of the revenue model submitted for discussion. Is she too-clever-by-half, developing complex financial structures that even your lawyer can’t understand? Expect to hear from this investor every time you are in contract with a customer as she tries to tell you how to structure that deal. Does he wait until the day of close and then call you and tell you that he found out you have a competitor and is going to lower the valuation by 30% now that you are in a lockup? This person is always going to be trying to find and exploit any leverage they have over common.

People are who they are and will show their colors early. When you take investment you are entering a long term relationship where there will be ups and downs. Be sure to read the signs in that first negotiation and make sure this is someone who you want to have that relationship with. And so will I.