Securing funding is stressful aspire, but it doesn’t have to be that way. We recently sat down with three VCs to figure out the best way to start an investment network from scratch and negotiate the first term sheet.
Earlier this week, we had the first part of that conversation with James Norman of Black Operator Ventures, Mandela Schumacher-Hodge Dixon of AllRaise, and Kevin Liu of both Techstars and Uncharted Ventures.
In part two, the investors go into more detail on what to ask for in a term sheet and red flags to look out for.
(Editor’s note: This interview has been slightly edited for length and clarity.)
Why should you know what’s going to be in a term sheet before you see it?
Mandela Schumacher-Hodge Dixon: Don’t wait until you get a term sheet to go back and forth. The term sheet should reflect what has already been verbally agreed, including the valuation. Don’t wait until you get that legal agreement in your inbox to start pushing back because it’s really annoying and it’s starting to affect how they feel about you.
I’ve even seen investors pull out the term sheet. No one is bulletproof, but you really want to be as bulletproof as possible at every stage of this. That requires preparation and clear communication.
James Norman: As you plan your entire fundraising process, lean into it, and begin to see what the market thinks, you’ll want to have a bottom line in terms of what you’re willing to accept. At some point you may have to capitulate, but be convinced [that bottom line] and have a reason for it.
VCs try to invest in leaders, so they know there’s going to be a power dynamic here. How to get that done and move things forward [impacts] how they think you’ll be doing other things like hiring employees and acquiring customers.
Which mechanism should I use in the beginning?
Norman: Once you have the term sheet, the game is really on.
In terms of terms, you want to make sure you get an agreement that matches the level you’re at with your company. You don’t want to end up with an angel investor trying to get you some Series A Preferred documents or something like that.
If you have a pre-seed or seed-stage startup, you should be using a SAFE (a Simple Agreement for Future Equity agreement that Y Combinator came up with in 2013) 99% of the time. It has all the standard language you need; no one can contradict it. [If they do]say, “Talk to Y Combinator about that.”