Both sides must be fair in a term sheet negotiation.

By Basil Peters

After being an active angel investor for about fifteen years, I realized that many of the discussions I was involved in were virtually identical to ones I’d had many times before. A good example was during the negotiation of a term sheet. These usually involve a handful of angel investors, and a few entrepreneurs, who all want to build the very best term sheet for their Basil Peters1exciting nascent enterprise.

Unfortunately, the previous experiences, and depth of knowledge of the individuals are almost always very different. To finalize a term sheet, everyone involved must come to an agreement on some fundamental principles which will have a profound effect on the future of the company. Just a few of these terms include vesting, corporate structure, governance principles, financing strategy, valuation and exit strategy.

Each one of these terms includes aspects of fairness, ethics, law, business, entrepreneurship, psychology and investing. Very often, the initial opinions of the people around the table are radically different. In most cases, these are well-meaning, intelligent people who all sincerely want to find the best solution.

[Email readers, continue here…]  Angel investing today is similar to where venture capital investing was in the mid-1980s. Back then, there was no consensus on best practices in that industry. As an example, twenty five years ago, most VCs used common share deal structures. It was not until the later 1980s that the preferred share structure became popular.

During those times, VCs had lots of conferences where thought leaders gathered to discuss term sheets, deal structures and fund strategies. As a result, there is tight agreement today on the form of VC term sheets and definitive investment agreements. Angel investing is rapidly evolving to the same state of development, as a result of networking, industry associations, and deal sharing between angel groups.

Basil Peters is perhaps the best known name in the world of early stage company exits. His groundbreaking book, “Early Exits” has become a textbook for angel groups and entrepreneurs throughout the world. His Strategic Exits Corporation provides M&A advisory services, and he is much in demand as a speaker at angel and entrepreneur events worldwide.  

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One Response to Both sides must be fair in a term sheet negotiation.

  1. Bob Chalfant says:

    Harry,
    Your term sheet will probably include things like:
    – nonbinding
    – no-shop
    – antidilution
    Well, if it’s non-binding then you should be free to continue shopping the idea. Otherwise, if the deal does not close, you’ve lost 6 weeks to a month.
    Antidilution is intended to screw you and is usually thrown out by the follow-on investors, so get rid of that onerous term.

    For a 21st century term sheet, do some research here: http://www.seriesseed.com/

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