I have spoken with several entrepreneurs recently who were going through the term sheet process of fundraising. As I have written before, there are certain elements of a term sheet that are more standard, as well as terms that are more aggressive and not entrepreneur friendly. I think you can also learn a lot about the VC based on their term sheet.

Speed to get term sheet

How quickly a VC gets to a term sheet is a great sign of how fast they can move to support you. It is also a great sign of their interest and commitment that getting to a term sheet quickly is a priority.

Exploding term sheets

I have seen entrepreneurs get term sheets that expire in 24 hours. Within reason you don’t want a term sheet to be out there forever, but exploding term sheets are classic negotiating tricks to force entrepreneurs into making quick (and sometimes bad) decisions. Just communicate the time you need to reasonably make a decision and don’t fall victim to being forced into something. This is the start of a long-term partnership that should not be rushed.

Core waterfall terms

There are some terms that affect the payout distribution such as liquidation preferences. Something like a 1x non-participating preference is common and provides an OR scenario whereby the investor gets small downside protection or shares in the upside. A 3x participating preferred preference provides an AND scenario whereby the investor gets both. Make sure you understand the waterfall economics and how the preferences work.

Length of term sheet

I have seen one page term sheets as well as 20+ page term sheets. This is a good clue into how bureaucratic the VC might be, as well as what terms they really care about. The VC should also be able to explain why any term is in there; “this is how we always do it” should not be the reason.

Adjusting term sheet down

A term sheet is non-binding. But a classic negotiating trick is to try and drag out the process, cite things the investor has found in diligence, and try to negotiate down many of the key terms at the end. At this point they know the entrepreneur is likely committed and will go through with it anyway. Be careful of major changes at the last minute as a way to use negotiating leverage.

Contact with current investors

Sometimes there are scenarios where the term sheet will adversely affect current investors. I have seen good investors who reach out to those current investors to talk through the scenario and explain the rationale. I have also seen new investors who just force it on existing investors with no conversations. Pay attention to how your new investor treats people.

There are many things you can learn from your new investor in the term sheet process. Pay attention to make sure they are the right investor for you - a good partner is more important than the money!