14. Don’t wait for a term sheet. Come to a handshake agreement before getting lawyers involved.
13. Having lawyers involved will give you confidence the deal is done right. This is peace of mind worth the tie and money.
12. Don’t finalize the deal until after your lawyers write it up.
11. If you do wait for a term sheet, the negotiation then becomes the term sheet instead of the envisioned business arrangement.
10. Spend time talking through the deal before the lawyers get involved, and you will capture the spirit of the deal.
9. Three critical details: 1. How much will be invested? 2. When and how much gets returned? 3. How will the company protect the investment?
8. If you fail to have a business agreement, the term sheet drafted by the investor’s lawyer will heavily favor the investors.
7. An agreement from the investor’s lawyers will most likely cause a confrontation and tough negotiation. This negotiation could end in failure or, worse, terms which preclude future investment.
6. To be fair and save on legal fees, the entrepreneur and investors should agree to the financial and operating terms prior to lawyers getting involved.
5. The right deal will work today and tomorrow, and it will not discourage the next round of investors.
4. That first term establishes the foundation and flexibility of capitalizing the company. This is of utmost importance.
3. If the cap table after the initial angel round is too onerous, attracting quality investors in future rounds is very difficult.
2. Later stage investors don’t want their first discussion with prior investors to be a confrontation focused on overly protective terms.
1. Unless your business has proven itself to be an incredible opportunity, new investors will pass because there are cleaner deals out there.