Speaker Q&A: Negotiating your First Term Sheet

May I have your attention please welcome Paul Soares senior reporter UK and European startups for TechCrunch Mandela Schumacher Hodge Dixon CEO all Rays Kevin Liu head of portfolio capital and Investments Tech Stars and James Norman General partner black operator Ventures Hello well thank you for joining us here Today Um there should be a QR code going up in The screen in a minute for you to submit Questions through so it'd be awesome if You could submit your questions for that So I'm going to kick things off first With one or two pre-prepared questions Um On how Founders can best understand and Negotiate the first term sheet Now Due diligence is usually something Associated with investors something Investors have to do and but I guess it Applies for startup Founders as well so They they want to know who's planning to Invest in them and scrutinize the terms Of the term sheet so I guess it'd be Good to know if you could give me one Absolute do and one absolute Dawn that Founders should be mindful of when I guess negotiating or signing the first Term sheets Um I'll give a do okay Um I mean if you're talking about doing Diligence on an investor I'm always

Going to talk to other Founders that They've invested in how they treat them What happens when you're running low on Money like how they actually interact With you like that's one do and I guess For me a don't would be you know don't Lie like that's the thing you don't want To try and posture Um with something that you don't have You can always you can you can embellish A little bit but don't lie right don't Be like oh you know I got I got so many Term sheets man I I can't talk to you Like that'll only get you caught up you Know that might work one person at a Time with someone who's just like Desperate to get a deal done but like You know Um I don't is don't try and create Forcing factors that don't exist Okay Kevin I think I do is be very very Prepared before you even enter these Conversations right Um even basic thing go on the investors LinkedIn right see see what they talk About on LinkedIn uh as a early filter Before you even get deeper into thinking About If they would be the right investor Right there's so many little things I Think most families just forget to do or Are too overwhelmed to actually do to Get good Intel on investors before you Have that conversation

Um on a downside I think don't hmm Don't get too caught up in the in some Of the details of the actual term sheets Right You know I know a lot of Founders get Very they want to optimize for price They want to optimize for dilution early On and sometimes what you tell them is Look this looks like the best deal you Have right now Do a great job in the next 18 months Come back at the series a and optimize On that round Right oh okay yeah I um it's hard to go Last I agree with everything you said Um what you definitely should do Irrespective of what investor you're Pitching is be yourself I know that can Feel really hard because I in my last Conversation on the other stage I was Saying be prepared understand the rules Of the game but you have to understand This is a long-term relationship and if You are in having an intention to marry Someone you might want to Google the Hundred questions you should ask and Discuss before you get married but part Of this you should have that type of Intention with investor relationships And bringing your full self to the Conversation because whatever you sell Them on as the character of who you are As a leader you have to keep that act up

For the next five to ten years and so It's really exhausting when you are Presenting yourself as something than You really are and so I really just Welcome you to find that balance between Understanding the game that you're Playing the culture that you're entering But also being true to yourself because I've seen so many Founders who are well Funded but they're miserable they're Miserable because they made an agreement To be something they're not and they Kept having to keep this act up so just Like really have that conversation with Yourself about like how you want to show Up in an authentic way because it also Gives the investor permission to be more Authentic too and again there's a power Dynamic there's money involved there's Legal involved the thing I also want to Mention Um is ask them how the communication What the expectations are around Communication once the deal is done Right we've been talking about like how Do you get the term sheet what should be On the term sheet but there's this whole Most of your relationship will be after That so having a shared agreement on is Are we expected to send monthly investor Updates are you am I actually I the Founder going to be working with you the GP are you going to hand me off to the Analysts and Associate and that's the

Person right where dissonance happens in Disagreement and relationships is when There's not a shared agreement right and So get clear on your communication post The term sheet in the investment as well I want to double down couple things they Said Um definitely don't over optimize Yourself on dilution right like what They're saying like you're gonna give a Piece of the company if you find someone That you really like to partner with Who's really going to help accelerate You who has some sort of expertise like Just layering on all the things they can Bring to the table take that into Account right and think about what does It look like always think to yourself Like what's it look like for me to have 100 a zero then be like what does it Look like for me to have 90 of 20 Million dollars okay and keep that going To the point where you're like what's it Look for like for me at five percent of 20 billion dollars like keep that in Mind like don't don't over optimize for That because you just you just spinning Your wheels at that point the other Thing is this is specifically for black Founders like think about how you show Up like you can try to show up in ways That you know you we may have been kind Of taught to show up in a professional Environment to get a job to get a loan

Things that nature you're not actually Building a relationship with the person That you're getting a job from or Getting a loan from is Chase you know You might be trying to show up and do That and it might convert for you Because they get comfortable that you're Safe In this in this situation what do you Show up trying to act like you're the Archetype or not you're still not Getting the check So you might as well be yourself and in Doing that you're going to lessen the Mental Cycles you have to do to present Yourself in that room what you're going To do is you're going to open up this Opportunity to take advantage of Something that's actually inherent to You as a black person which is actually Being one with Community being one of Authenticity being one of your word Being someone who builds relationships Naturally that's that's the superpower That you have as a black person and so If you try and step away from that to be Like someone else you actually can't Leverage your only superpower to Actually get this done because it's a Really it's a relationship driven game And when you naturally come as yourself The no's the things that nature they Start not to meet as much so you can go Meditate you can go separate yourself

You can take a little break but you can Come back to being yourself and like That's the only way you're gonna really See yourself through this and if you Don't believe you can be yourself I want You all to go look up toyan she is a Black female CEO of a company called City Block Health that raised nearly a Billion dollars and nobody knows about Her right there's also Phaedra Ellis Lampkin from promise who's raised over 100 million there is Heather Fernandez Of Saul who just raised over 100 million So there's examples of people who are Walking in their truth and may not have The same visible diversity or sorry the Identity of the people writing the Checks and they are still winning so It's very important for you to see Examples when you feel like if I'm Myself I'm not going to get the bag Okay the questions are now coming in Thick and fast so I'll try and get Through as many of them as I can here so Um Term sheets I guess are daunting for First-time Founders Um Who should they be speaking to before Signing them so you know should they be Speaking to lawyers should be speaking To other Founders and what's the sort of Things they should do yeah so before Today I I messaged about 20 of my

Founders I was like what what's the best Advice you have and overwhelmingly they Said ask your lawyer get a good lawyer That has experience with Equity rounds Right don't just talk to random word Because that lawyer who knows how to do This don't know what's market rate right They'll know what the terms are they Know what other investors are thinking And hopefully they they represent your Interests right I think the legal Guidance is a big one yeah it's a big One because I don't know I have beef With this because I feel like I could do This myself but you can't actually Go negotiate terms shooting their lawyer Their lawyer is not going to take you Seriously so like having the best legal Just puts you in a different world my Lawyer actually got mad at me the other Day because I do know how to do this and I ran the whole process with the same Emails he called me he's like who do you Think you are like you didn't do the Filing with the SEC like just do do your Job I do my job it costs a couple Thousand dollars I do my job don't do That again like because he's trying to He's trying to look after me not just Trying to get the process done but like The the order of PR the process of order Like how everything is done making sure Everything's buttoned up so when you do Go to that next round or you do have an

Exit like there's nothing to look at in Your paperwork everything's organized And ready that only happens when you go With a a real legal firm that has Experience in startups and like for me That goes like Gunderson Wilson cincini Like Cooley dla like these are the People you should be touching base with Because they're the ones working with Other companies you see exiting okay do You have any more to add to that Mandela Or is that covered I co-sign the Gentleman to my left I I really you know Because I was thinking I gave advice in The last uh stage about the importance Of Consulting with other Founders but Really it's very important to have great Legal counsel but you think about this Like you can Source information from 50 Different Founders and doing all that Leg work or you can talk to One lawyer Who's been in this game for 10 years and Who knows the trends that are happening Today and can give you that information So when I think about building a team as A leader it's not just people who are on Your payroll right and your employees Your team is your legal counsel your Investors and really thinking about Um even to your point James about the The brand cachet and the weight that Those logos carry right of different uh Legal firms those send signals to the Other side as well like okay they really

Know what they're doing yeah James Norman legal firm don't got no weight Wilson cecini they're like oh you know What we better relax like we should just Do it Wilson Cincinnati said they're Gonna do you know do you see many Founders signing the term sheets without Having consulted anyone is that quite Common I hope not So next question Um if you have 20 or more seat or Angel Investors is this going to be an issue In getting term sheet for series A I think if you had the right legal I Don't think so if you got a bunch of Stuff hanging out there where you don't Know where the paperwork is your cap Table is not set up it could be a little Bit of a hassle but If you're properly set up you know we've Invested in tons of things they got like 17 people on the cap table now we're Going to wrap it up in the preferred Equity everybody's got their stuff set You can't it's kind of like if I really Want to do that if I'm the lead as long As their stuff's kind of clean It's my job to clean it up like that's The game if I'm doing like a preferred Equity like lead seed round Yeah and I think one thing to factor in Just from a man because I work with so Many Founders who go through this

Process and what they underestimate is The people management process the more People you have on your cap table the More people you have to keep updated so It's really important again Communication you set the expectations Up front with everyone participating in The round and everyone participated in This leg of the 12 to 18 month Journey Until the next financing on what the Communications are going to be because Oftentimes Founders are just inundated With angels and people who really want To be involved but they don't really Need their help and they're not sure how To have that conversation so be clear up Front about like are you just like is This relationship the priority is I Really need this money and I need your Network I don't need your advice right Now right like give them Direction and People really like that and leaders as Well they want to be told how to best be Leveraged okay So here is one from someone who has Received the term she offer so my Startup received the term sheet with one Week deadline can we negotiate deadline And what if we have other potentially Better offers in the works Oh I've never been in this situation Kudos to you whoever that is Um but yeah the timelines are real so I Don't know any thoughts on that

Generally I would ask the the founders To push back and I've never had an issue Of where I found a pushed back on a term Sheet deadline and it hasn't been okay Right it's similar to somebody I brought Up in the other conversation is if You're at the term sheet level you have A lot of Leverage the investor wants to Do a deal here and that's something that You should at least ask so what would The typical time scale be for you could Probably extend that a week two weeks Maybe okay yeah okay yeah I I want to Repeat that again because I done Forgotten the conversation right now Like once that term sheet comes like This investor has already spent all this Time this money this work is emotionally Convicted mostly convicted that they Want to work with you so the leverage Continues you know what I'm saying yeah And I think what you what I didn't Understand until I worked at a VC firm Is the inner mechanics that hap Partner Their personal capital on the line to Vouch for you internally irrespective of What the other partners thinking again Different decision-making processes Depending on the firm but there's many Firms where if a partner wants to do it Irrespective of what the other partners Want to do they're going to do it but What happens again is if they give a

Timeline of something and you are Hardballing them you're going back and Forth it's affecting how they look to Their colleagues and partners as well so That's a again it's just understanding What I oftentimes recommend is gets Inside of their mind get inside of their Lived experience and the better you can Make them look the more leverage you Have Okay Um how much Equity should you give away Precede 10 seed five percent series a 20 that Was backwards right you say did you say Preseason ten percent free C 10 seat Five percent oh seat five percent yeah Oh I don't know absolutely yeah anybody Doing no see how much money you raise Them but yeah Five percent good for you yeah yeah Um the rule of thumb that I've always Shared is do not give up more than 20 Per financing round like it hasn't Really been scaffolded the way you just Laid out or if you're old five percent Ten percent they're like 10 20 is kind Of like the rule of thumb that I've Sourced from a variety of investors and The founders but maybe you two have seen Different things no no I think that's Fair I mean I probably won't give up 20 Appreciate it's happened happens Regularly though

Um you know 15 for sure 20 yeah why not It's possible yeah I mean yeah to unpack It a little bit part of the issue Beyond Just the founder equity and want to Optimize for that is is Downstream Investors right by series B series C These investors are coming in with 50 100 million dollar you know checks they Need to know that there's enough skin in The game for you to to keep going on Right it's still a company more recently The capital was a mess by the time with Series B the series B investor had to Come in and clean everything up right Just and then create a new structure so That the founders will continue to feel Incentivized right yeah you kind of want To stay away from that because that can Start to incentivize distance and advice From the best thing yeah Okay Um so a lot has been said about the Balance of powers and Swinging to Investors recently away from Founders so But I'm guessing the balance of power Isn't the same across all first time Deals you know one company might already Be profitable another might have just Signed their first customer another Might have founders with a track record So what kind of things do you think Might swing the balance of power back Towards kind of Founders particularly in The in the current economic climate

I mean if you're talking about raising Money in terms sheets the only thing That has power is you got another term Sheet I mean one here's the thing here's The thing that I recently like really Realized was the value of derivative Like the the rate of change like if this Company over here makes one million Dollars but it took them three months or Three years to do it right good company Great founder blah blah blah that's cool Good opportunity in that company this Company over here makes five thousand Dollars from 10 20 30 customers and that Five thousand dollars happened over Three months because one person used it This much and they use it that much Didn't use it that much and there's a Trend of that going up and there's like 10 million of these people both of those In fact this is a more investable Company the the the rate of change is Dictating the momentum that investors Want to see and the momentum is the Leverage the momentum in the term sheet Are to leverage that's it Like you because the trains left The Train the Train the train is moving Very fast in this person's world the Train over there is making stops you Know it's picking people up it's doing This thing it's moving that direction But this train over here is like I don't Know if I can catch it you know so

That's the main that's the major Leverage when you got the momentum okay Yeah I agree with that and I think There's there's always money there's all There's money out there Um and I don't know if this is going to Land well but there's always money out There like I remember one day reading The headline on my Twitter feed and it's Like everything is changing no one's Deploying capital and then the very next Day I saw a very public-facing founder Who we probably all watched the Hulu Series about Um raise over a quarter billion dollars For an idea that he had previously Funded of two female CEO of two female Co-founders but I'm not going to have That conversation right now but the Point is is money is out there how do You align yourself to that money is Always the question no matter what the Economic situation is overall in the Market and so the things to think about Is again that I've seen investors Evaluate companies on time and time Again is like I said the found founder What is your experience building Companies at scale right that's what They're assessing you on if you don't Have that box checked off okay next spot How big is this Market how Innovative is This solution how competitive is this Market right what is your ability to

Attract Talent what are your networks Like what is your leadership skills like Right there's all these sets of criteria Which they're evaluating on and you Don't have to check every box but you Need to check a majority of boxes in Order for them to feel like all right I Know this is a risky bet but I'm willing To take this risk and um so there's Always money out there and I don't want People to be discouraged because I know Investors are investing right now forget What you see on Twitter they are Investing if they have a hot deal and so The way to tip the leverage in your Favor also is again you can go after a Lot of small checks or small name or no Name investors or you can say I'm Zeroing on these top three because if I Can get one of these top three even to Maybe not invest in me via they're firm But as an angel investor right I can Leverage their name to get all of the Other people right so it's about the Strategy in which you're enlisting to Create the leverage and have it be in Your favor and I think if you do not Come from a background like I did where I had this network and I had this ivy League pedigree I didn't have any of That but what I did have that honestly In hindsight wasn't on purpose I got Very lucky but I had my first investor Was a name brand investor in Silicon

Valley and I was able to leverage that Name all over and the checks kept coming Right so again have a strategy Um I just want to add one more layer to That just saying you know there's Certain check boxes that you want to be Able to hit but remember like you're not Presenting a checklist to investors Right that's like trying to convince Someone else you're doing is right you Got to take those check boxes and craft It into this story that's like the first Pitch is the trailer of the movie that You want to see and now you've seen the Movie and now I feel like I want to be In the movie like you're paying a Picture right and that picture has to Involve and be relatable enough to the Person across the table it has to Involve them that person wants to feel Like they're going to be a part of the Movie if you have if you have if you Paint a story that's all about you and How great you are well you keep going Being great Right but like if there's a story being Cultivated about how the world's around And we're together doing it then like That further like lists its emotion from The person across from you to want to be Doing it with you like that's what You're trying to do Like you're trying to pull people in to Be a part of what you're doing it's the

Same thing you would do if you're trying To hire the most talented person that You can't afford you're trying to pull That person in You know I'm quite convinced that for For nine percent plus of Investments the Investors walk in having an impression Already of what they want to invest in Right so if you're you know going to the Meeting and trying to pitch a brand new Idea right and it's gonna be it's not Gonna land well right you need to appeal To what the investors are looking for Okay it's great so we've got about four Minutes left I'll try and get through One or two more questions here Um Here's what it says does Equity Crowdfunding hurt chances of investment Don't think so you know it's it's Interesting like I'd say three or four Years ago when it was still not as Mature I think it was more of that Optics of people thinking that if you Win a refunder your crowdfund there Maybe you're a lesser so of a company You know I know that we funded guys very Well I know a teammate had to start Injury quite a while too and what I do Recognize is for certain kinds of Companies you can get a ton of value out Of those in addition to traditional Venture right depending on Academy Depending what kind of company

Um and position really right it's not It's much more accepted today than it Was years ago I totally agree totally Agree it shifted for sure I think it had A certain stigma at first from the Snootiest of people at the tippity tops Of Silicon Valley like oh you couldn't Raise from us there you go right because This this ego this elitism is very real And rampant right but I think that's Shifted over time as we've had very Successful companies prove that this was A viable way to get capital and build Success successful companies so now that There's more proof there's more a belief And and other people have come and the Stigma has been removed for sure Okay Um Can you raise and do accelerator at the Same time or should you wait to finish And then do it you say what Can you raise and do accelerator at the Same time oh oh you should or should you Wait to finish no I mean man why not Like I mean I guess hold on let me Qualify that right if you've been Building companies for a long time and You went into an accelerator to get the Opportunity to raise money as soon as You get on the ground you should be Organizing yourself to raise money like I win the 500 startups because I Couldn't raise money I was like no one

No one believes I can do this I got no Signal 500 startups will be set signal So the day I get there I'm like all the Sales Mario I don't actually know that Who knows all the people right and I Still I still ride with those people Today they made all my introductions to Get to any capital I ever had so like That was my intention like but if you're In if you still need to learn you need To build you're trying to cultivate your Idea you got to focus on the accelerator The last that last like you know 25 to 20 of the accelerator you can get Yourself together and begin preparing For that fundraise do your demo day kick Something off but like it depends on Where you're at in your journey Every down says yes right if you go to An accelerator you should definitely Leverage The Brand recognition of the Firm to get in front of investors even If it's like soft meetings in the early Partial accelerator program Um like 100 yeah do not wait till demo Day to start fundraising Yes and Um like you James I participate in Accelerator as well and I I just for Anybody who hasn't tried fundraising Before it's really hard it's like a Whole other business on top of your Business and I don't know how large your Teams are and who's taking care of

Things at home base to make sure the Lights are on and the charts are moving Up and to the right as you're doing These emails and these pitch meets it's Just it's a it's a real challenge like On the floor on the ground like doing Both at the same time and but I do think Uh I don't know if it's a dirty little Secret but I do think a lot of Accelerators there's a demo day at the End right but the best Founders have Investors lined up before right so again Successes premeditated planned and on Purpose so you have to start filling Your pipeline so that when they show up To demo day they've already invested and Then you can leverage that excitement Because it's about momentum yeah like if I didn't have a lead investor going to Demo day I wouldn't raise anything And when it happened you know people From outside of Silicon Valley want Access to a Silicon Valley deal I Already had Silicon Valley investor that Was that did the demo day money comes in Okay and we're just about out of time Now so um I'd like to thank you all for Coming here and sharing your insights And thanks for everyone for coming here Today