INSUBCONTINENT EXCLUSIVE:
The pre-money cap, the CEO-common director spot, drag-along provisions and liquidation preferenceMital MakadiaContributor
Mital is a
partner at Grellas Shah, focusing on representing tech startups and startup founders
She provides counsel on a variety of corporate and transactional matters and negotiates and structures equity financings, MA transactions,
and commercial and intellectual property transactions for her clients. When startup founders review a VC term sheet, they are mostly only
interested in the pre-money valuation and the board composition
They assume the rest of the language is “standard” and they don’t want to ruffle any feathers with their new VC partner by “nickel
and diming the details.” But these details do matter.VCs are savvy and experienced negotiators, and all of the language included in the
term sheet is there because it is important to them
In the vast majority of cases, every benefit and protection a VC gets in a term sheet comes with some sort of loss or sacrifice on the part
of the founders – either in transferring some control away from the founders to the VC, shifting risk from the VC to the founders, or
providing economic benefits to the VC and away from the founders
And you probably have more leverage to get better terms than you may think
We are in an era of record levels of capital flowing into the venture industry and more and more firms targeting seed stage companies
This competition makes it harder for VCs to dictate terms the way they used to.But like any negotiating partner, a VC will likely be
evaluating how savvy you appear to be in approaching a proposed term sheet when deciding how hard they are going to push on terms
If the VC sees you as naïve or green, they can easily take advantage of that in negotiating beneficial terms for themselves
So what really matters when you are negotiating a term sheet As a founder, you want to come out of the financing with as much overall
control of the company and flexibility in shaping the future of the company as possible and as much of a share in the future economic
prosperity of the company as possible
With these principles in mind, let’s take a look at four specific issues in a term sheet that are often overlooked by founders and company
counsel:What counts in pre-money capitalizationThe CEO common directorDrag-along provisionsLiquidation preference.What counts in pre-money
