Securing funding is stressful. Effort, but it doesn’t have to be. We recently sat down with three VCs to learn the best way to spin an investment network from scratch and negotiate their first term sheet.
Earlier this week, we featured the first part of that conversation with James Norman of Black Operator Ventures, Mandela Schumacher-Hodge Dixon Allreys, and Kevin Liu of Techstars and Calchart Ventures.
In part two, we’ll cover more details about what investors should be looking for in a prospectus and what red flags to ask for.
(Editor’s note: This interview has been lightly edited for length and clarity.)
Why do you need to know what’s going on in a term sheet before you see it?
Mandela Schumacher-Hodge Dixon: Don’t wait until you get a term paper to start going back and forth. The term sheet should be a reflection of what was previously agreed upon verbally, including the assessment. Don’t wait until you get a legal agreement in your inbox to start pushing back, because it’s really annoying, and it will affect how they feel about you.
I see investors pulling the paper. No one is bulletproof, but at this point you want to be as bulletproof as possible. This requires preparation and clear communication.
James Norman: As you plan your entire fundraising process, you’ll want to have a bottom line in terms of what you’re willing to accept as you lean into it and start seeing what the market thinks. At some point, you may need to write, but be sure [that bottom line] And have a reason for it.
VCs are trying to invest in leaders, so they know there can be a power dynamic here. How do you manage that and move things forward [impacts] How do you think about doing other things such as employees and land customers.
Which method is best to use in the beginning?
Norman: Once you have a sheet, the game really begins.
When it comes to terms, you want to make sure you’re getting a deal that matches your level with the company. You don’t want to end up with an angel investor trying to give you some Series A preferred stock or anything of that nature.
If you have a pre-seed or seed-stage startup, 99% of the time, you should use SAFE (a simple agreement for future equity deals created by Y Combinator in 2013). You’ve got all the standard language you need; No one can argue with it. [If they do]like “Go talk to Y Combinator about this.”