Choose Your Termsheet Battles Carefully
Since there is a limit to the amount of negotiation that takes place on any deal, founders that intend on fighting to win every point of the battle will rarely ever win the war. Founders should enter negotiations for investment with a clear understanding that things are bound to change and that it is their duty to ensure that the people entering their company feel welcome as partners. When the welcome feels akin to pulling out teeth the signs are ominous.
As a founder, the next time you sit with a VC for an investment deal negotiation, ensure that the most important matters are on terms that you are comfortable with e.g. investment amount, valuation, reserved matters, board composition, liquidation preference, ROFR, anti-dilution, clawback, conditions for the second tranche, etc. These are points worth negotiating on.
Then there are also the terms that will raise a sceptre of suspicion that can be discussed with the investor but remain non-negotiable e.g. look-in of founders shares, vesting of founder shares, one vs two tranches, information rights, approval for major expenses, termination, fraud, etc. The harder you fight for altering or removing these clauses the bigger the ditch you are digging for yourself.
Therefore, I would like to offer you a peek into how I prepare for any negotiation with founders. I mentally create 3 lists of points: must-haves, should-haves, would-love-to-haves. My priority is to ensure that I get all my must haves and in the absence of any, I am willing to walk away from the deal or concede points from my other two lists. This strategy works well as it allows for win-win conversations. Invariably, I have walked away from negotiations not only with my entire must-haves list and most of my should-haves but also, conceding points that were important to the other side as well. It is only when both parties walk away reasonably happy from a negotiation table that everyone knows that a good deal has been cracked!