Any VC is motivated by profit and wants to see a very significant return on their investment within 5 – 7 years. Because of that they are prepared to do just about anything to secure the best possible return on investment (ROI) from your business when they issue you with a term sheet or stock purchase agreement.
This doesn’t mean that they want to drain the life out of your business because they are in fact your allies as you seek to grow your business quickly and successfully. They understand that you are also profit driven and are not inclined to steal your incentive to succeed.
But it is important to bear in mind that upon signing the term sheet (a non-binding agreement that outlines the overall terms of ownership of the business upon funding) the negotiating power then moves from you the business owner, to the venture capitalist. It is here that issues like valuation and liquidation preferences are decided.
While you should celebrate getting a term sheet caution is nonetheless called for because it invariably means that the VC is serious about investing. As the first step in the stock negotiation process the term sheet is crucial. You will need a lawyer on your side to keep things level because your ignorance could be a liability and any investor is aware of that. Failing to get a lawyer is your fault not theirs.
Along with your lawyer you will view the terms that are included in the term sheet and then you will need to be in communication with the VCs so as to decide upon the final stock purchase agreement. This is when the deal is sealed and needs to be most beneficial for you.
The one way to really make the process simpler is to secure a number of term sheets from different firms as the same time. You want to ensure that you create a market that is competitive for the VC firms and to do this contact them all in the same time frame. When you email them notify them that you will are seeking to close the round of funding for whatever amount of dollars by a specific date. This effectively creates an air of urgency among your target VCs.
Remember the law of supply and demand? Since there is just one of you and lots of them your value rises. Using this practice will level the field whenever a VC seals you into a ΓÇÿno-shop’ term sheet that essentially stops you from shopping your business to other potential investors for the period during which the VC determines whether or not to invest.
And lastly, when you obtain multiple term sheets it can significantly simplify the whole negotiating process by getting to grips with any issues before they become major problems. When you enjoy greater leverage over the VCs through the creation of a competitive market you are likely to enjoy better terms when you are given a stock purchase agreement.