Negotiating a term sheet with a venture capital firm may seem like a challenge. And, there will be some challenging aspects to the negotiations. However, remember that the venture capital firm understands and expects some negotiating around the term sheet. Everyone hopes to get the deal done -- so be pragmatic and consider the big picture when working to finalize the term sheet.
Determine the lead investor and a single investor's counsel
Negotiating with multiple investors and multiple lawyers can be time consuming and expensive. If you have multiple investors, ask to have a lead investor designated and shared investor's counsel.
Involve your attorney
If you have hired an attorney that has done venture financing deals, your attorney likely knows what terms are reasonable and where you should focus your negotiations.
Model it out
There are a lot of variables at play here and changes in some can drastically change the payouts down the road. Model out the investment over the five year period in your projections and see the impact of changes in the valuations, liquidation preferences, etc. Look at hypothetical transactions down the road (What if we sold for $20 million in 2 years or $100 million in 4 years?) or see what occurs if the business goes belly up down the road. Find someone that is skilled in excel and ask for their help to build the financing (and possible future financings) into a model.
Prioritize your negotiations
The term sheet will have numerous terms that could be negotiated, but a heavily edited term sheet could kill the deal. Focus your comments on a few key items such as company valuation, the size of the option pool used to attract future employees, the number of board members, compensation for the founders, vesting on founders stock, and liquidation preference.
VCs don't have "non-negotiable terms
A VC or attorney may tell you that certain deal points or provision are "standard" or "always the way we do it." However, that doesn't mean it isn't negotiable. While it may be a preference or typical, each investment is different and few terms (if any) are never changed in the context of a deal.
Act professionally if you are evaluating multiple term sheets
In the event you are considering multiple investment offers or are awaiting a term sheet from an investor who is likely to invest, be certain that you keep the potential investors informed of your timetable. Investors who feel like they are being played against one another will oftentimes balk at the deal and find another candidate for their investment.
Remember that you have to work with the VC after you close the financing
Negotiating a term sheet (and closing the entire deal) can seem adversarial, but don't create a situation where you can't work with the VC who will ultimately be serving on your board of directors. VCs expect to negotiate the deal, expect issues to arise in the process, but expect to get the deal done.