All Money Is Not Good Money: How to Create Your Own Term Sheet for Investors
When it comes to raising capital from investors, you might feel the pressure to take the first opportunity that comes your way. However, while we often think that more money brings more freedom, not all money is good money.
Investment agreements come with terms and conditions, and as founders, it’s important to make sure our interests don’t get buried in the fine print. Yes, founders must create term sheets too, not just investors! Create a term sheet that reflects your conditions of the deal and protects control of your company.
A term sheet is more than just a quick checklist of requests; it outlines critical elements of an investment, including company valuation, investment amounts, pre-emptive rights, voting rights and liquidity options. It’s important to come to the table prepared, understand the terminology and know where there’s room for compromise.
As the founder of five successful cash flow companies, I’ve met with several investors, and I’ve made my fair share of mistakes. One way I can best help founders who find themselves on this same path is to share the lessons I’ve learned the hard way so that they don’t have to make the same mistakes!
Here are three key lessons you’ll always want to keep in mind:
Protect Your Interests
You are your own best advocate, and it’s important to carefully build a team around you to support and advance your interests. This includes hiring an attorney to draft your term sheet. Investors will have their own attorneys to write contracts that are most beneficial to them, so working with your own legal professional ensures you are well represented and shows you have thought deeply about your terms, valuation and control structure.
Understand the Terms and Negotiate
Terms are always negotiable. They’re also renegotiable. I didn’t know this when I first started, but I learned the lesson quickly when I ended up renegotiating the terms of my first round. I had been eager to raise capital and didn’t take the time to fully understand the terms of the convertible notes, safes and agreements I was signing at the beginning. Things like dilution, preemptive rights, voting rights and founder…