Negotiating a Term Sheet

Rally Managing Director Charles Beeler gets into the details on how founders should approach negotiating term sheets with investors — and what can be learned about each other in the process.

Charles Beeler
February 1, 2023


A word some people love and others loath. The difference between being a good negotiator and a weak one can make a world of difference in many walks of life, and entrepreneurs who consider it a weakness should spend time and energy to make it a strength.

All negotiations are not created equal. While the end goal should be to maximize the overall benefit to your side through the negotiation process, measuring this overall benefit is not always black and white.

When you negotiate the purchase of a car, measuring the success of the outcome is easy. You want the best possible terms on the transaction at hand meaning the lowest possible price for the car. You are unlikely to ever deal with the person on the other side of the table again, so the ongoing relationship does not matter, and there is no circumstance where the process or outcome is likely to affect a future negotiation. You can (and should) be as aggressive as possible, and leave no stone unturned in trying to get the best price you can. You can walk away with the salesperson thinking you are a total jerk who left nothing on the table for them and feel good about it (face it, these guys aren’t trying to be your friend, and don’t really care about your best interests).

When you negotiate a term sheet with an investor, you are negotiating a transaction that, if successfully concluded, will result in the party on the other side of the table becoming a key investor in your Company, likely a board member (who cannot be kicked off the board), and an important part of your long-term success or failure. The person across the table will be someone you interact with on a regular basis over the course of several years (and possibly over multiple startups), and they are likely to have a significant degree of input on whether you stay in your current role over the long haul. In other words, while the negotiation is about a short-term matter (the financing), the overall outcome of this process will have long-term implications, and as such you should not lose sight of this during the process.

We are not saying you should fold on key issues, or back down on terms that matter to you personally. You shouldn’t. However, as you represent your side in this process, you need to be cognizant of the impact this process will have on your long-term relationship with the investor. You should also use the process to continue learning about your potential new investor and the relationship that is forming between you.  If you are dealing with a quality, experienced investor, they will consider the negotiating process to be another key part of their due diligence work on your company (and you) – if they are not paying attention to how you manage the negotiation process and thinking about how this will translate into your ability to negotiate on behalf of the company after they invest they are not at the top of their game.

The best crafted term sheet will NEVER protect you from every potential situation where you could potentially be screwed over, so trying to negotiate to this outcome is a futile effort. You and the investor are going to have to trust one another when it comes to certain issues – if the negotiation process makes you feel you cannot trust them, then trust us when we tell you to walk away and seek an investor you trust to be above board and fair on issues that by their very nature will not be black and white.

This post will not get into negotiating tactics (a link to a useful resource for this is below), with one exception. Don’t forget one of the most basic, important, and commonly ignored tricks to negotiating – putting yourself in the other parties shoes. It is especially important given the ongoing relationship you will have with the other party.

So, put yourself in the investors shoes. What do they want to achieve in the negotiation process?

(1) They want to reach an agreement on the investment, within boundaries they deem acceptable.

(2) They want to learn how you operate in these situations, and whether they can trust you and have confidence in you negotiating on behalf of the Company going forward. This negotiation is part of their due diligence process.

(3) They want to feel wanted. They want to hear that they are an important part of your decision process, and that you value their involvement going forward.

(4) They want to get the best possible deal, and will sometimes not think of the long-term impact this will have on your relationship. In other words, it is very possible they will not be thinking about the long-term implications of this short-term negotiation. (If you are an investor reading this post, PLEASE re-read it and take this into consideration. We know you have negotiated dozens of transactions in the past and feel you have an upper hand as a result, but remember you are entering a long-term relationship with the entrepreneur and use this process to help them understand terms that may be simple to you, but are new and confusing to them. You will be happier for it in the long-run and they will rightly trust you more.)

We are putting together a series of articles about term sheet terms and will include some ideas for how to reach a reasonable outcome on a few of the key ones, but will not get into those here (trying to set a CapGenius record for the shortest post with this one….).

Aside from making up for a horribly long hiatus since our last post (long story, not very interesting unless you were part of it), the main purpose of this short post is simply to remind you that when negotiating a deal where you will have many and frequent interactions with the other party going forward, getting the best possible outcome on every term (the “damn the torpedos” approach) may not provide the greatest overall benefit to your side. Focus on the issues that really matter, select the ones you are willing to give on, and pick a few where you will need to find a reasonable middle ground.

Note:  If you are looking for a good resource on negotiation tactics we recommend “Getting to Yes” by Roger Fisher and William Ury. It’s a bestselller that is used at several top business schools, and is a short and well-written book. The link is for what looks like a new version of the book which we assume is an update (the link to Amazon is NOT an affiliate link and we have no financial interest in the book, whether you buy it or where you buy it from). We have not read the new version, but unless they managed to really screw up something since the old version, this one is worth reading.

This article originally appeared as a guest post on CapGenius.

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