5 tips to go from Term Sheet to Money in the Bank

First things first. Thanks to Pablo, our CFO and one of the most grounded people I know— for without his deep expertise, his raw pragmatism and his infinite kindness, none of the learnings below would have been possible. Gracias jefe!

Getting a Termsheet is definitely the hardest part of fundraising — convincing an investor to believe in you, your business and the market opportunity you are after, so much that they want to give you their (LPs) money. Wow, well done! For more on how to get there and find the right investor, read my post on How to find true love in VC.

Bad news though. A round is far from over when you get a Term Sheet. You still need to get the Money in the Bank and for that there’s a necessary pain to go through: negotiating The Legals.

Very quickly and in a nutshell, Legals 101 — what are we talking about when we refer to The Legals:

• Term sheet (TS): (ideally) a one-pager outlining the key terms of the potential investment
• Shareholders’ and Subscription Agreement (SSA): private document(s) detailing the key terms of the investment and regulating the future relationship between the Company and the shareholders
• Articles of Association (AoA): Company statutes, by definition public (filed into Companies House)

I’m not going to focus on the content of each of those docs. I’m instead going to focus on the part that nobody talks about: the process. Yes, it’s unsexy, and boring, and time-consuming…but it’s also very much necessary: a poorly run process can 1) delay you founder getting money in the bank and going back to work (which is the ultimate goal of fundraising, let’s not forget); 2) even kill the deal: no exaggeration, I’ve seen that happening a few times and have been very close other few and, trust me, it’s not a happy place — this post is indeed part brains part guts.

So, here five tips for you and your investor to go from Term Sheet to Money in the Bank as quickly as possible and survive The Legals without killing the deal, yourself, your lawyers or your investor. Hope they help to keep you sane!

#1. Choose a “tech-lawyer”

The wrong lawyers can kill a deal. And wrong does (not only) mean bad, it can also mean inexperienced in Venture Capital deals. To mandate lawyers for whom working with VCs and startups is their bread and butter is absolutely essential. First, because they’ll know the process upside down. Second, they’ll know what’s market standard and what’s off-market, making the negotiation much more straightforward. Third, and most importantly, because they will understand the ethos of a venture capital investment deal.

VC investments are very different to M&A transactions or even PE investments. In Venture Capital, the investment marks the beginning of a relationship, as parties will be working together for years to come and legal docs set the basis of such relationship. Think of it like a pre-nup: yes it covers everything that can possibly go wrong in a marriage, but the two parties signing it do so hoping to love each other forever and to never have to bring up the pre-nup again(see more on my obsession with VC and dating here). Same with the SSA and AoA. This is very different to the divorce papers that parties sign when selling/acquiring a company.

Thus, a VC investment is not a zero-sum transaction that by definition will be adversarial and confrontational. It is a win-win partnership and legals should be negotiated in a collaborative manner. To have lawyers that don’t understand this can put the transaction at high risk.

Best way to find “tech-lawyers” is to ask fellow entrepreneurs. And ideally have a lawyer lined-up by the time you get a Term Sheet so he/she can review it. It is common understanding that what’s agreed on the Term Sheet stays in the legals so make sure your lawyer has reviewed it before.

#2: Agree on an execution timeline and stick to it

Sh*t happens. And each day that goes by without having signed the legals brings additional risk to the deal. Not to mention that the earlier you have the money in your bank account, the sooner you can go back to work.

Big (bad) things can happen in the world any day, but it’s not only those that can add more difficulty to the execution. Your numbers might not be so great that month, one of your key employees might leave, and investors might get cold feet. Your lawyer might go on holidays or even leave the firm. Sometimes reality trumps fiction and you don’t want it to happen while your deal is wide open.

So, make sure that before starting the execution process, there’s a clear timeline outlining:

1. Every step from kick-off call to money in the bank: this is important, the show is not over once the legals are agreed, parties still need to sign the docs and wire the money
2. The party responsible for each step
3. The deadline for each step: this should be a specific date
4. The closing day: ideally 4–5 weeks after kick-off

And make sure you stick to that timeline religiously. You are a bulldog, money is your snack — you don’t drop it till it’s in the bank. Until then stay on top of every step and chase, chase, chase — your lawyers to meet deadlines, your investor to submit comments, your accountant to send you the requested info, your existing investors to sign, your new investors to wire the money…

Don’t get off people till money is in the bank.

#3: Keep key existing investors in the loop (and happy) from day 1

An unhappy key existing investor can kill a deal. And by key I don’t necessarily mean your most value-adding investor, not even necessarily your largest, I mean only those investors you actually need to sign the new deal. We are talking process here. You should check your previous round legals to see who they are.

Hopefully you have a great relationship with your previous investors and they support the new deal. In any case though, truth is that bringing a new lead investor will mean that existing investors will 1) for sure lose some power/rights; 2) potentially get diluted. Be mindful of that, not only because they supported you earlier on but because (most likely) you will need them to sign the new deal.

So, best practice is to:

• Share the Term Sheet with your key existing investor(s) and make sure that they are onboard with the terms — preferably in writing
• Have your new lead investor speaking to your previous key investor(s) early on. It’s important that he/she doesn’t feel left out of the process
• Discuss with your existing investors their follow-on investment as soon as you have an offer. Most likely they will have the right to do prorrata so you’ll need to work it out depending on the agreed size of the round and interests of new investors
• Share with your existing investors the draft of the legals (after one or two iterations) and address any issue right the way. Issues will generally be around governance (board seat, voting rights…)

Managing key existing investors, especially when you are cutting down their rights and stake, is an art. Listen to them, understand where they are coming from, give them some love and make them realize that you all win if the company wins. Whatever happens, don’t neglect them, they are still very much powerful and you need them to close the new deal.

#4. Choose your battles (and your timings). Fight. Stay standard

From my experience, even in founder friendly deals (not speaking about +1x participating liquidation preference kind of situation, run fast if you see one of those), sticky points are usually around the following three points:

a. Valuation, round size and founders’ dilution. Don’t forget employee option pool as they will impact dilution

b. Vesting and good leaver/bad leaver provisions. Note that this is a very sticky point for both investors and founders and both have good reasons for it, so make sure you address it from the beginning and spend proper time on it

c. Board and voting rights. Think about it in terms of who you will need to make what decisions

To know what’s acceptable and non-acceptable on any of the above points ask other founders in your network as well as your (tech-) lawyers. But that’s off focus for this post, so, back to the very (un-)sexy process, here some of my thoughts on how to approach the negotiation process:

1. Don’t outsource all the work to your lawyers — when it comes to commercial matters, they can advice, but you decide. So, do your homework and understand what each of those clauses means and what are their implications for you and your company. My recommendation to every entrepreneur: read Venture Deals and/or Secrets of Sandhill Road
2. Fight for what is important to you. Good investors respect entrepreneurs who stand for what they want (as long as it’s reasonable of course, see below). In fact, most of the times you will actually be aligned in principle with your investor. For example, good founders are very dilution sensitive. It makes sense, it’s your company. Dilution in a standard round should stay between 18–22%. It’s not on the investors’ interest to dilute you any more either, as probably there will be more rounds to come and we want to make sure that you have enough at stake to keep you incentivized
3. Choose the timing. Bring up key issues from the beginning and allow time for negotiation, don’t play with time pressure. It doesn’t help anybody and it won’t reflect good on you
4. Be reasonable and stay as standard as possible. If you have chosen the right VC as partner, hopefully everything they propose will all be pretty market standard and they will be willing to hear your demands and meet you somewhere in between. But don’t go too off-market. First, because it might put the current deal at risk. Second, because even if you get it your (off-market) way this time, you might be putting your next founding round at stake. When it comes to the deal’s legal structure, unlike in almost everything else, you don’t want to be an outlier.

#5. Keep the dialogue with your lead at all times

The execution phase can be a draining process. We’ve said that legals are like a pre-nup that covers for the worse case scenario. Well, spending weeks solving for all the things that can go wrong is a risky exercise for a relationship that is just starting — no honeymoon here.

And given that you and your new investor are going to have to work together for years to come, you both want to make sure that you come up of this process knowing each other better and having a stronger bond. It’s gonna be a time full of complicated conversations — use it as an opportunity to build a strong foundation for when the real work starts.

Be like Harry and Sally, speak all the time, about everything; don’t leave anything unsaid.

Ideally you leave the legal nitty gritty to lawyers and focus on discussing the commercial points directly with your lead investor. When doing so, it’s important that you explain to your investor where you are coming from, why a specific request matters to you. And it’s equally important that you listen to why your investor is asking for what he/she is asking. Never forget that you are both here because you want to work together, you are partners, not adversaries. Keep the right mindset and you will (almost) always get to a position that works for both of you.

My recommendation, like in any relationship: be honest, be upfront and be reasonable. Ah, and don’t play games. Unlike in dating, there’s really too much at stake here.