Raising Your Institutional Round: Chapter 15
This is the 15th chapter of my upcoming book, “Move the Needle Anyway(s): Raising Your Institutional Round.” There are a total of 16 chapters. The book is currently with the publishers, however, I wanted to start sharing the content in a form of a series of blog posts so the startup ecosystem can benefit immediately. I hope you enjoy :)
Chapter 15: Get to the Terms You Want
Assuming one or more of your partnership meetings are successful, you have done the most you can with those parties to get to a term sheet. Their investment committees will vote and decide whether they want to invest in you (or not).
Assuming one or more of them want to move forward, you will get verbal confirmations and indications from the partner who is leading your deal internally (your champion). A leading indicator of this would be their calling you for a brief conversation. This conversation will typically go as follows:
They will frame the call as wanting to understand what sort of terms you are thinking and aligning those expectations. This is great—you tell them you are excited about the possibility of partnering with them and getting this round closed so you can get back to business. It’s best to let them price your round rather than you setting the price right out of the gate. If they ask you for a price, let them know you are letting the market price your round, and that you are going for the best deal that allows you the working capital to successfully grow your business.
The terms they will circulate are not definitive but will be framed as “we are thinking such and such…” They will be fishing to see if you like or dislike the terms, and whether they can get you to verbally commit to accepting them even before the call. Remember, they have committed to your process and want to maximize their chance of winning the right to lead your round. More often than not, these deal terms will result in a lower valuation and higher level of dilution than you would like. Don’t give anything away on this call—simply suggest that you are excited about the possibility of partnering and would love to have a documented term sheet to review and run by the key people in your company. If you truly believe this partner is the best partner, let them know: 1) You want to work with them and that they are top of your list, 2) It is also your fiduciary duty to seek the best terms and that the decision isn’t going to be your sole decision. TLDR: position yourself as their champion for your internal decision-making processes.
Assuming you play this right, you will get a term sheet within 24 hours or so. Normally, you have up to 5 days to decide—VCs will put pressure on you to make a decision. This is fair since they need to know whether you are in or whether they should be reallocating their funds and focus to other potential investments. If they try to force a decision within only 24–48 hours, ask for more time since you need key stakeholders (co-founders, investors, and legal team) to review and redline the terms, and to perform reference calls on the investor.
Regardless of whose terms you eventually settle on, I suggest doing backchannel on each VC and partner. First, you ask each VC who is bidding for the deal for some founder references so you can be confident you are getting into the business with the right party. Aside from that, it is always great to expand your founder network—founders have a soft spot for being helpful to other founders—it is one of the things that makes startups so special. Secondly, you ask existing investors or existing founders in your network about the VC. Once you have the term sheet in hand, you also want to catalyze other top investors to put forth their terms—this is in parallel to performing reference calls. Doing this will help you:
Get as many terms on the table as possible.
Evaluate the options you have.
Negotiate the best deal terms by asking other parties to up their bid.
To achieve the aforementioned, you will be evaluating your funnel to identify who you should let know that you have a term sheet. This is more art than science since you want to use it to get other terms without scaring any parties out of your process. In general, you want to let someone know you have terms if they are nearing or already at the partnership meeting and investment committee stages of the process.
You don’t want to scare away parties who have just gotten to diligence, for example. The reason being is this—until you’ve officially signed a term sheet and decided on allocations and a date that money will be wired to your bank, irregardless of having a term sheet or not, nothing is guaranteed. For various reasons, VCs can still pull term sheets or disrupt your process unexpectedly. While this isn’t good practice, nor is it fair, it is the reality. Your job is to do your best to preserve optionality as long as possible, so always keep key, promising parties informed and in the mix. Until terms are agreed upon, signed, and there is a clear path to money in the bank, the fundraising process is still alive. You can use messaging to the effect of: “We are getting close to terms we want, but would like to do anything to help you move your process along since I can see us being good partners. What do you need from me to get there?”
The goal: get as many term sheets as possible so you can negotiate towards the terms you want and get the deal done. Whether that is price, voting rights, or board seats and board composition, the hardest part of this process is done.