Growth
Inside term sheet negotiations: in conversation with Dan Bowyer
- Growth
- Video
- 4 minutes read
Term sheets throw up any number of challenges for fundraising founders. One of the thorniest debates is how far to push back on terms that might depart from your ‘ideal’ fundraising outcome. We get seed investor Dan Bowyer’s thoughts on negotiating your term sheets, and how to use this key step to build strong investor relationships that will stand you in good stead to scale post-fundraise.
- While both parties will protect their interests in a term sheet negotiation, the atmosphere should be one of mutual understanding and support. Fortunately, UK market standards have developed and matured significantly in recent years, and highly exploitative terms are now rare.
- Investors’ fear of missing out is a primary driver of interest in any funding process. The first term sheet often unlocks other expressions of interest, which gives you valuable leverage for your negotiating position.
- One of the most useful reference tools is having a term sheet on hand, which gives you the ability to compare and contrast with the terms being offered by other investors.
Receiving a term sheet from an investor is always an exciting moment for a founder raising money. But in reality, getting that term sheet is simply “the beginning of another nightmare,” according to SuperSeed partner Dan Bowyer: namely, the negotiation phase. Sitting down with Emily Wood from HSBC Innovation Banking, Dan dives into the tricky moments and critical decisions for fundraising founders. Watch the interview now, or read on for a summary of Dan’s most important term sheet lessons for early-stage founders.
Preparing for the negotiation
Term sheet jargon can feel impenetrable, particularly for first-time founders who haven’t been through a fundraising process before. Dan recommends, “The first thing you do when you get a term sheet is make sure you’re up on all your definitions: pre-money versus post-money, convertibles, double-dip preferences etc. Of course, please seek out legal advice for a review. And if you can, chat with your peers, ask them anything that feels uncomfortable for you.
Then, you should be in a position to go back to the investor and tell them what you’re comfortable with, and where you need to push back.
What happens if an investor pushes too far?
Founders in the thick of a fundraise may be concerned about investors setting out terms that could be counterproductive financially or that potentially affect their control of the business over time. But while investors are always keen to secure a ‘good’ deal, “99.9% of investors are not out to fleece you,” says Dan.
Fundraising should be a productive process where incentives are aligned. If an investor issues terms that make it difficult for the company to grow and succeed, they’re only putting their own returns at risk in the long run. And founders should remember that “it’s a very incestuous world we live in,” as Dan puts it. If an investor is pushing market standards, “you’ll be found out pretty quickly as word gets round.”
How to maximise leverage
But there are market standards and expectations that “As awful as it sounds, the only way to really negotiate is to have other term sheets,” says Dan. From a founder’s perspective, perhaps the most powerful chip to play is having a first term sheet on hand, which gives you the ability to compare and contrast with the terms being offered by other investors.
Term sheet resources
As well as Dan’s views, you can access a range of term sheet resources from HSBC Innovation Banking. Dive into our annual Venture Capital Term Sheet Guides, understand your term sheet basics, and dig into the consequences of technical terms like liquidation preferences.
Any opinions expressed are merely opinions and not facts. All information in this document is for general informational purposes and not to be construed as professional advice or to create a professional relationship and the information is not intended as a substitute for professional advice. Nothing in this document takes into account your company’s individual circumstances. HSBC Innovation Banking does not make any representations or warranties with respect to the accuracy, applicability, fitness or completeness of this document and the material may not reflect the most current legal or regulatory developments. HSBC Innovation Banking disclaims all liability in respect to actions taken or not taken based on any or all of the contents in this document to the fullest extent permitted by law. Nothing relating to this material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
