Certainly many urban myths are perpetuated online about the process of negotiating deal terms with venture capital funds and angel investors. The stress associated with negotiating balanced deal terms becomes more manageable once entrepreneurs become familiar with the language of "term sheets."
A term sheet is a written outline of the primary components of a proposed business financing. For most young companies, receiving a term sheet, also referred to as a "letter of intent," from a respected venture capital fund is cause for celebration.
Here are some tips and brief descriptions of the fundamental elements of term sheets to help you enter negotiations with confidence.
- Don't Waste Your Money. The responsibility and cost for initial term sheet production is usually born by the venture capital fund, not the entrepreneur. While many deal terms are structured by entrepreneurs at the angel and "friends and family" investment rounds, it is highly unusual for a venture capital funds to accept a term sheet that originates from the entrepreneur's legal counsel. Typically, venture funds simply mock up or edit existing term sheet documents. Some larger venture capital funds may even employ their own in-house legal counsel making the document origination process highly streamlined and fast.