Two people negotiating

Venture Capital | Part 6/7: Deploy

Term sheets explained, what they really mean

At this stage, it’s time to decide on terms. We’ve decided to give you money (hurrah!) and not a lot of people get this far. Now, take your negotiation skills out to bring in the terms that work best for you.

Here, we will cover key terms, what they really mean, why they are there, and what is in the best interest of both parties —

Valuation

Money required / Equity willing to be released

The money required is completely dependent on your company, market, your geography. Eg. A company in the USA needs more money to hire than in emerging markets, and a company building real estate needs more money than one in software. How to do it: Find out how much you need and add a 20% buffer for contingency.

Here is a way you can justify valuations

Using a reference is good to find comparables. “No competitors” is not a good thing!

P/E ratio

P/S ratio

Cap table

Cap Table 101

Option Pool

Liquidation preference

Board Structure

Anti-dilution

Dividends

Closing conditions

Pay to play

Voting Rights

Pro-rata

Right of First refusal

To retain as much control as they can, companies and existing investors often have a right of first refusal (ROFR) in place. This gives them the option to buy back stock before a shareholder is permitted to initiate a direct sale to an outside investor. Companies also sometimes place transfer restrictions on issued stock that allow them to block direct sales.

Drag-along right

Tag-along right

Founder stock

Employee stock options

Bad leaver and good leaver provisions

This draft is part of a 7-piece series focusing on the inside of the VC industry. It is told by a current VC associate, to help entrepreneurs lift the curtain. The goal is to learn to raise better by speaking the language and giving VCs what they look for. It will include —

1. Sourcing | Where good founders like to work, play, rest
2. Pitch Deck | What we look for in Ideas
3. Initial Meeting | What do we look for in People? On Founder Market Fit
4. Due Diligence | How Heavy is the Past? — Data in VC, Financial analysis of VC firms
5. IC | The Art of Making Good Decisions
6. Deploy | Term sheets
7. Exit | Ways to do it