Chapter 3 of Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist is a transitional one that sets up the next few chapters on Term Sheets.
At the end of 2005, we participated in a financing that was much more difficult than it needed to be. All of the participants were to blame, and ignorance of what really mattered in the negotiation kept things going much longer than was necessary. We talked about what to do and, at the risk of giving away super-top-secret VC magic tricks, decided to write a blog series on Brad’s blog (Feld Thoughts) that deconstructed a venture capital term sheet and explained each section.
That blog series was the inspiration for this book. The next few chapters cover the most frequently discussed terms in a VC term sheet. Many VCs love to negotiate hard on every term as though the health of their children depended on them getting the terms just right. Sometimes this is inexperience on the part of the VC; often it’s just a negotiating tactic.
The specific language that we refer to is from actual term sheets. In addition to describing and explaining the specific terms, we give you examples of what to focus on and implications from the perspectives of the company, VCs, and entrepreneurs.
The various terms in a term sheet fall into three categories: (1) economics, (2) control, and (3) everything else. In this chapter we explain what we need by economics and control as we get ready to roll into the meat of the term sheet.