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Term Sheet Hacks: Get a Great Deal as an Entrepreneur

This article is a guide for entrepreneurs on how to negotiate favorable terms with venture capitalists (VCs) during Series A funding. It emphasizes the importance of understanding the dynamics of the negotiation and recognizing that VCs are often more experienced and informed than entrepreneurs.

• The article highlights the asymmetric knowledge gap between entrepreneurs and VCs, emphasizing that entrepreneurs are usually less experienced in term sheet negotiations compared to VCs who negotiate several term sheets per month.
• It emphasizes that VCs have access to a wealth of knowledge and resources, including standard term sheet templates that encapsulate industry practices and decades of experience.

The Importance of Leverage for Entrepreneurs

The article stresses that negotiating a good deal as an entrepreneur requires leverage. Leverage is the power to influence the outcome of a negotiation, and it stems from having strong alternatives.

• A strong Best Alternative To a Negotiated Agreement (BATNA) gives an entrepreneur more bargaining power because they have a viable option if the current negotiation fails.
• It emphasizes the importance of seeking multiple offers from different investors to create competition and increase leverage.

VCs and Lawyer's Perspective

The article discusses the challenges entrepreneurs face when negotiating with VCs, highlighting the inherent conflict of interest between them and their lawyers.

• It states that most law firms have closer relationships with VCs than with entrepreneurs, which can create a bias in their advice.
• It suggests that lawyers, who are often paid by the hour, may be more inclined to expedite transactions and accept "standard" terms, potentially disadvantaging entrepreneurs.

Understanding the Dynamics of Venture Capital Deals

The article highlights the need for entrepreneurs to understand the dynamics of venture capital deals and how they impact their negotiations.

• VCs, who are investing their limited partners' money, are primarily focused on maximizing returns, not necessarily helping entrepreneurs achieve their goals.
• The article emphasizes the importance of entrepreneurs being proactive and informed about the negotiation process to protect their interests.

Using Leverage Effectively in Negotiations

The article emphasizes the importance of leverage in negotiations and how entrepreneurs can use it effectively.

• It discusses the importance of having a strong BATNA, which provides entrepreneurs with a backup plan if the current negotiation fails.
• It emphasizes the value of creating competition by securing multiple offers from different investors.

The Importance of Understanding Term Sheets

The article stresses the importance of entrepreneurs understanding term sheets and their implications for their startups.

• It recommends entrepreneurs familiarize themselves with the key terms and provisions within term sheets, such as valuation, vesting schedules, and protective provisions.
• It suggests seeking legal advice from a lawyer who specializes in startup financing to ensure that they fully comprehend the terms and implications of the term sheet.

Strategies for Negotiating a Good Deal

The article provides practical strategies for entrepreneurs to improve their chances of negotiating a favorable deal with investors.

• It advises entrepreneurs to create a board of directors that reflects the company's ownership structure and empowers them in decision-making.
• It recommends negotiating a separate board seat for the CEO, particularly when the CEO is also a founder.