TheFunded has published what it believes should be a standard termsheet in venture financings. Their argument is that the following balances the rights and incentives of investors and founders well, and the negotiation should be limited to valuation and amount being raised. Interesting point of view.
FFI Plain Preferred Term Sheet –
Chris Dixon has earlier proposed his (similar) “standard” termsheet here.
These are all commendable efforts and in my view, in the right direction. The issue arises when certain provisions are more valuable to one party than other (due to differential view on the business, different degrees of experience etc) – so in some cases, founders may be optimistic to not care about participation, but may want higher valuation. Or, the VCs may perceive certain additional risks and may want protection against those. Such deal-specific characteristics encourage “trade-offs” amongst terms – a la “if I have to offer a higher valuation to be competitive in the deal, let me add more participation”. A negotiation process in the end is about trading off what is less valuable to oneself for something that might be less valuable to others.
Would love to get thoughts from the readers on where they tend to fall on this debate.
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Niranjan – in my experience, there is fair degree of negotiation that happens on the term sheet. For a couple of reasons – one, competing term sheets are not uncommon, and that allows the entrepreneur leverage. Two, many entrepreneurs I have come across in India always carry the option of not raising capital, so non-usage is competition. Third, the VC who gets far along to issue a term sheet is fairly excited about getting the deal done and moving on asap, so if the requests are reasonable (in their perspective), they are often incorporated.
Do you have any statistics of how many deals fall through because the terms of the TERM SHEET was not accepted by the startup. Typical startup cannot afford to skip the offer and hope to get the deal from other. It is not that VC are standing in line. Given that situation, it finally boils down to what terms VC offer and the startup accepting it. Unless one has more than one TERM SHEET on hand, there is not much room to play with.
Alok, could you post something which is more relevant to the Indian marketplace? Maybe a sample VC termsheet after taking out all confidential information.