Brian Hirsch, Managing Partner
Reminder: All good deals accelerate to a close.
Before we dive into negotiating the terms, it’s worth pausing to reflect on making it this far. Your team aced the pitch (7 Steps to Deliver the Perfect Pitch) and completed the diligence process (How to Run a Great Diligence Process). If you are lucky enough to have 1 or 2 Term Sheets, you are in a fortunate position, but the clock is ticking on this opportunity. As we like to say at TVP, “all good deals accelerate to a close.” This is particularly true when it comes to negotiating the terms with your potential investors. Here are some factors to consider as you work through the terms to reach the best possible outcome for your company:
Research and understand industry market multiples.
Understanding what stage your company is and how companies like yours are valued is key to understanding a reasonable valuation. For example, SaaS valuation multiples are typically a multiple of ARR based on growth rate and underlying SaaS KPIs like LTV/CAC ratios, payback period, and renewal rates. Do your research and be well informed before you start your negotiation.
Insist on a pro forma cap table with the term sheet.
While the headline pre-money valuation is a focus for most founders, it’s not the only important consideration, and valuation can mask overall dilution. Make sure you have alignment on the size of the raise and any need to increase your option pool. Looking at the pro forma cap table allows you to see the true total dilution from the financing by shareholders.
Create multiple options.
At TVP, we encourage our portfolio companies raising new rounds to get any offers, even if they don’t like the headline valuation, in writing. Having a term sheet in hand often serves as a catalyst for other investors to move more quickly and be more competitive when submitting terms.
VCs are in the business of making investments in startups and negotiating term sheets regularly. Most founders will only negotiate a term sheet a handful of times in their careers. In other words, most VCs can see through BS or positioning.
Focus on what matters.
While valuation is important, it’s not the only consideration. Often the firm you choose, the partner who will serve on your board, and your investment partners’ ability to help accelerate your vision are more impactful to long-term success than maximizing valuation. Remember, the average early-stage venture investment lasts 6–10 years. The founders we’ve known that have chosen the top bid instead of choosing their preferred partner typically regret that decision.