Term Sheet Negotiation Guide

NEGOTIATION PHILOSOPHY

Term Sheet Negotiation Fundamentals

TERM SHEET NEGOTIATION PHILOSOPHY

WHY NEGOTIATION MATTERS:
☐ Terms compound over the company's life
☐ Bad terms can kill future rounds
☐ Sets precedent for future investors
☐ Protects founder interests
☐ Affects exit economics
☐ Determines governance dynamics

NEGOTIATION PRINCIPLES:

1. KNOW WHAT MATTERS
   ☐ Economics > Control > Everything else
   ☐ Pick your battles wisely
   ☐ Don't fight over minutiae
   ☐ Focus on what impacts outcomes

2. UNDERSTAND LEVERAGE
   ☐ Competition = leverage
   ☐ Strong metrics = leverage
   ☐ Time pressure = leverage (or enemy)
   ☐ Walk-away option = ultimate leverage

3. SEPARATE STANDARD FROM NON-STANDARD
   ☐ Know market norms
   ☐ Push back on non-standard
   ☐ Accept standard gracefully
   ☐ Pick non-standard battles carefully

4. RELATIONSHIP OVER TRANSACTION
   ☐ This is a long-term partnership
   ☐ Win-win is the goal
   ☐ Don't burn bridges
   ☐ Be firm but collaborative

TERM IMPORTANCE HIERARCHY:
| Priority | Term Category | Impact |
|----------|---------------|--------|
| 1 | Valuation/Economics | Ownership |
| 2 | Liquidation Preference | Exit $ |
| 3 | Board Control | Governance |
| 4 | Protective Provisions | Flexibility |
| 5 | Anti-dilution | Future dilution |
| 6 | Everything Else | Minor |

---

COMPREHENSIVE TERM ANALYSIS

Complete Term Sheet Checklist

TERM SHEET ANALYSIS FRAMEWORK

═══════════════════════════════════════
ECONOMIC TERMS (PRIORITY 1)
═══════════════════════════════════════

VALUATION:
Pre-money valuation: $_____M
Post-money valuation: $_____M
Price per share: $_____
Fully diluted shares: _____
☐ Reasonable for stage? ☐ Yes ☐ No
☐ Comparable to market? ☐ Yes ☐ No

INVESTMENT AMOUNT:
Total round size: $_____M
Lead investor: $_____M
Other investors: $_____M
☐ Enough for milestones? ☐ Yes ☐ No

OPTION POOL:
Pre-round pool size: ____%
Pool increase required: ____%
Post-round pool size: ____%
☐ Pre-money or post-money shuffle?
☐ Reasonable size? (<15% increase)

LIQUIDATION PREFERENCE:
Preference multiple: _____x
☐ 1x (Standard)
☐ >1x (Non-standard - RED FLAG)
Participation: ☐ Non-participating ☐ Participating
Participation cap: _____x (if participating)

Preference analysis:
Total $ invested this round: $_____M
Total $ in preferences: $_____M
Exit needed to clear prefs: $_____M

DIVIDENDS:
Dividend rate: ____%
☐ Non-cumulative (Standard)
☐ Cumulative (Non-standard)
☐ No dividends (Best)

═══════════════════════════════════════
CONTROL TERMS (PRIORITY 2)
═══════════════════════════════════════

BOARD COMPOSITION:
Total board size: _____ seats
Founder/CEO seats: _____
Common shareholder seats: _____
Investor seats: _____
Independent seats: _____

Control assessment:
☐ Founder/Common majority (Best)
☐ Balanced (Acceptable)
☐ Investor majority (RED FLAG)

VOTING RIGHTS:
Common stock votes: _____ per share
Preferred stock votes: _____ per share
☐ Standard (1:1)
☐ Supervoting (Non-standard)

PROTECTIVE PROVISIONS:
(Require investor approval for:)
☐ Amend charter/bylaws
☐ Authorize new stock classes
☐ Increase shares
☐ Pay dividends
☐ Merge/sell company
☐ Change board size
☐ Incur debt above $_____
☐ Issue equity
☐ Change CEO
☐ Change business focus
☐ Enter new business lines
☐ Annual budget approval

Assessment:
☐ Standard provisions only
☐ Heavy provisions (negotiate down)
☐ Unusual provisions (RED FLAG)

DRAG-ALONG:
Threshold: _____% (typically 50%+1)
☐ Majority of preferred
☐ Majority of common
☐ Both required
☐ Standard threshold?

═══════════════════════════════════════
INVESTOR RIGHTS (PRIORITY 3)
═══════════════════════════════════════

PRO-RATA RIGHTS:
☐ Major investor pro-rata rights
Threshold: $_____M investment
Scope: ☐ Next round ☐ All future rounds
☐ Super pro-rata (RED FLAG)

INFORMATION RIGHTS:
☐ Annual financial statements
☐ Quarterly financial statements
☐ Monthly financials
☐ Annual budget
☐ Cap table updates
Threshold for information rights: $_____

REGISTRATION RIGHTS:
☐ Demand registration rights
☐ S-3 registration rights
☐ Piggyback registration rights
Registration expenses: ☐ Company ☐ Selling stockholders

RIGHT OF FIRST REFUSAL (ROFR):
Applies to: ☐ Founders ☐ All common ☐ All shareholders
☐ Company first
☐ Investors second
☐ Standard structure

CO-SALE RIGHTS (Tag-Along):
☐ Investors can tag along on founder sales
☐ Standard provision

═══════════════════════════════════════
FOUNDER/EMPLOYEE TERMS (PRIORITY 4)
═══════════════════════════════════════

FOUNDER VESTING:
☐ Not required (Best - you're already vested)
☐ Continued vesting (Acceptable if reasonable)
☐ Restart vesting (RED FLAG)
Vesting schedule: _____ years
Cliff: _____ year
Acceleration: ☐ None ☐ Single ☐ Double

SINGLE TRIGGER ACCELERATION:
☐ On change of control
☐ All shares vest
☐ Partial vest (_____%)

DOUBLE TRIGGER ACCELERATION:
☐ Change of control + termination
☐ Within _____ months of CoC
☐ Shares accelerated: _____%

NON-COMPETE:
Duration: _____ months
Geographic scope: _____
☐ Standard ☐ Overly broad

═══════════════════════════════════════
ANTI-DILUTION (PRIORITY 5)
═══════════════════════════════════════

Type:
☐ Broad-based weighted average (Standard)
☐ Narrow-based weighted average
☐ Full ratchet (RED FLAG)

Trigger: Down round (price below this round)
Carve-outs:
☐ Option pool grants
☐ Acquisition consideration
☐ Strategic partnerships

═══════════════════════════════════════
PROCESS TERMS
═══════════════════════════════════════

NO-SHOP/EXCLUSIVITY:
Duration: _____ days
☐ Standard (30-45 days)
☐ Extended (RED FLAG if >60 days)

CONDITIONS TO CLOSE:
☐ Standard due diligence
☐ Board approval
☐ Customer reference calls
☐ Technical review
☐ Unusual conditions (list): _____

EXPECTED TIMELINE:
Signing to close: _____ weeks
☐ Reasonable (<6 weeks)
☐ Extended (negotiate)

LEGAL FEES:
Cap: $_____
☐ Standard ($25-50K cap)
☐ Uncapped (RED FLAG)

---

NEGOTIATION STRATEGY

Priority-Based Negotiation Framework

NEGOTIATION PRIORITY MATRIX

═══════════════════════════════════════
TIER 1: FIGHT FOR THESE (Economics)
═══════════════════════════════════════

VALUATION:
Issue identified: _____________________
Your position: $_____M
Their position: $_____M
Negotiation strategy: _________________
☐ Resolved ☐ Still negotiating

LIQUIDATION PREFERENCE:
Issue identified: _____________________
Your position: _____________________
Their position: _____________________
Negotiation strategy: _________________
☐ Resolved ☐ Still negotiating

OPTION POOL:
Issue identified: _____________________
Your position: _____% pool, post-money
Their position: _____% pool, pre-money
Negotiation strategy: _________________
☐ Resolved ☐ Still negotiating

═══════════════════════════════════════
TIER 2: PUSH BACK ON THESE (Control)
═══════════════════════════════════════

BOARD COMPOSITION:
Issue: _____________________
Your position: _____________________
Strategy: _____________________
☐ Resolved ☐ Still negotiating

PROTECTIVE PROVISIONS:
Issues:
☐ _______________: Request removal
☐ _______________: Request modification
☐ _______________: Accept (standard)
Strategy: _____________________

═══════════════════════════════════════
TIER 3: NICE TO HAVE
═══════════════════════════════════════

| Term | Current | Desired | Priority |
|------|---------|---------|----------|
| | | | |
| | | | |
| | | | |

═══════════════════════════════════════
TRADE-OFF MATRIX
═══════════════════════════════════════

Willing to give:
☐ _______________ in exchange for _______________
☐ _______________ in exchange for _______________
☐ _______________ in exchange for _______________

Not willing to give:
☐ _______________
☐ _______________
☐ _______________

Red Flags Deep Dive

TERM SHEET RED FLAGS ANALYSIS

═══════════════════════════════════════
ECONOMIC RED FLAGS
═══════════════════════════════════════

⚠️ >1x LIQUIDATION PREFERENCE
What it means: Investor gets 1.5x, 2x+ their money back first
Impact: In moderate exits, founders get nothing
Response: Push for 1x non-participating
Negotiation script: "1x non-participating is market
standard. We're happy to accept that but can't
accept [X]x as it misaligns incentives."

⚠️ PARTICIPATING PREFERRED
What it means: Investor gets preference + pro-rata share
Impact: Double-dipping on exit proceeds
Response: Push for non-participating or capped participation
Negotiation script: "We're concerned participating
preferred creates misalignment. Would you accept
non-participating or a [3x] cap on participation?"

⚠️ FULL RATCHET ANTI-DILUTION
What it means: If down round, convert at lowest price ever
Impact: Massive dilution in down round
Response: Push for broad-based weighted average
Negotiation script: "Full ratchet is very unusual
and would severely punish us for any down round.
Broad-based weighted average is market standard."

⚠️ EXCESSIVE OPTION POOL (>15%)
What it means: Hidden valuation discount
Impact: 15% pool at $10M pre = $8.5M effective pre
Response: Negotiate pool size or post-money pool
Negotiation script: "A 15% pool exceeds our 18-month
hiring plan. We believe 10% is sufficient and
propose that as our starting point."

═══════════════════════════════════════
CONTROL RED FLAGS
═══════════════════════════════════════

⚠️ INVESTOR BOARD MAJORITY
What it means: Investors control company decisions
Impact: Can fire CEO, approve/veto major decisions
Response: Push for founder majority or balanced board
Negotiation script: "We believe the best boards have
founder leadership. We'd propose a 3-person board
with 2 founder seats and 1 investor seat."

⚠️ EXCESSIVE PROTECTIVE PROVISIONS
What it means: Every decision needs investor approval
Impact: Slows decision-making, removes flexibility
Response: Push to remove non-standard provisions
Non-standard to remove:
☐ Budget approval requirements
☐ Hiring approval above certain level
☐ Any customer contract approval
☐ Any new business line approval

⚠️ LOW DRAG-ALONG THRESHOLD
What it means: Small group can force sale
Impact: Founders can be forced to sell against their will
Response: Push for majority of all shares
Negotiation script: "We'd like the drag-along to
require majority of all shares, not just preferred."

═══════════════════════════════════════
PROCESS RED FLAGS
═══════════════════════════════════════

⚠️ EXTENDED NO-SHOP (>45 days)
What it means: Can't talk to other investors
Impact: Lose leverage, time pressure
Response: Push for 30-day no-shop
Negotiation script: "We're committed to this process
but 60 days is too long. Can we agree to 30 days
with option to extend if needed?"

⚠️ UNUSUAL CONDITIONS
Examples:
☐ Key customer commitments
☐ Specific revenue milestones
☐ Executive recruiting requirements
☐ Partner confirmations
Response: Push to remove or make reasonable

Negotiation Tactics by Situation

SITUATIONAL NEGOTIATION TACTICS

═══════════════════════════════════════
MULTIPLE TERM SHEETS (High Leverage)
═══════════════════════════════════════

Strategy:
1. Compare offers in decision matrix
2. Use best terms as leverage on preferred partner
3. Create time pressure without burning bridges
4. Focus on non-price differentiators

Tactics:
☐ "We have competing offers at [range]"
☐ "Can you match [specific term] from another offer?"
☐ "We need to decide by [date]"
☐ "You're our preferred partner if you can [adjust]"

═══════════════════════════════════════
SINGLE TERM SHEET (Low Leverage)
═══════════════════════════════════════

Strategy:
1. Focus on standard vs. non-standard terms
2. Trade-off on less important terms
3. Build relationship while negotiating
4. Know your walk-away point

Tactics:
☐ "This term isn't market standard - here's data"
☐ "We can accept [X] if you can move on [Y]"
☐ "We're committed to partnering but need [X]"
☐ "Let's find a solution that works for both"

═══════════════════════════════════════
WEAK POSITION (Need the Money)
═══════════════════════════════════════

Strategy:
1. Accept reasonable economics terms
2. Fight harder on control terms
3. Protect downside scenarios
4. Get to close quickly

Tactics:
☐ Focus on terms that matter at exit
☐ Accept valuation, fight liquidation preference
☐ Ensure board isn't investor-controlled
☐ Get acceleration protections

═══════════════════════════════════════
STRONG POSITION (Hot Company)
═══════════════════════════════════════

Strategy:
1. Push for best-in-class economics
2. Minimize control provisions
3. Maximize flexibility
4. Set up for future rounds

Tactics:
☐ "We're seeing [X]x multiples from other offers"
☐ "We'd like to minimize protective provisions"
☐ "Can we do 1 board seat instead of 2?"
☐ "We'd like pro-rata to be optional"

Negotiation Tracking

Term	Offered	Counter	Final	Notes
Valuation	$_____M	$_____M	$_____M
Liq pref	_____x	_____x	_____x
Board
Option pool	_____%	_____%	_____%
Anti-dilution
Acceleration
No-shop	_____ days	_____ days	_____ days

---