When it comes to negotiating a terms sheet, there are several key elements to keep in mind. Here are a few things you should consider:
- Valuation is the biggest hurdle because it sets equity ownership.
Key terms that often come into play include the following:
- Liquidation preferences
- If the investors feel the pre-money valuation is too high, they may ask for a 1x or 2x liquidation preference.
- Investing founders share
- Investors want to know the team will remain in place for the first few years. They will likely require them to re-earn their shares.
- Redemption rights
- If the business goes in a direction that the investors are not comfortable with then some investors may prepare for an early exit.
- Consider convertible debt for an initial terms sheet and move to equity when you find the right lead investor. Keep in mind that there are many investors who want to be in the deal but aren’t willing to do the work for leading the round. This means that you will need to look for a lead investor. The criteria for a lead investor is an interest in equity and a willingness to invest more than $100K. This will generate enough motivation to properly develop the terms sheet.