Over time, I’ve developed a certain approach to negotiating term sheets with entrepreneurs.
The whole “email a term sheet document” back and forth method seemed inefficient to me. And, it put too much focus on redline edits rather than listening to each other.
So, I don’t trade paper as a starting point. Here’s what I do instead:
- When the entrepreneur is ready, we convene a meeting. His/her lawyer is there, as well as any co-founders.
- I ask for a conference room with a white board. I list out the various legal topics (board seat configuration, voting thresholds, etc.) and economic ones (option pool, preferred structure, ownership splits, etc.). All meaningful topics are put on the white board.
- I will have been empowered by my partners to agree to a deal within certain parameters. I then “fill in” next to each topic Kepha’s proposal.
- I then ask for feedback and try to listen actively. The entrepreneur(s) then talk about what they like and want to see modified. The lawyer often jumps in. I leave the room if they all want to caucus privately.
- We then continue to iterate. I talk about what is important to me and my partners and where there is flexibility and how much.
- Then, one of two things happens: we either get to a “handshake yes” or we “leave the meeting not as partners but continue as friends.” If the latter, the process ends and we say goodbye. If the former, and that happens 80% of the time, I then put those agreed-to terms into a term sheet and email the document to the entrepreneur and his/her lawyer. This ensures that everything discussed is now in writing. Honestly, there are usually almost no edits. We then sign the term sheet and are off to the races.
I’ve found this approach to be very transparent, open and honest. The entrepreneur has legal counsel in the room, and both parties are able to share what their needs and wants are in a term sheet.
Also, it minimizes the usual bluffing and positioning that can happen. It helps ensure a very direct and honest dialogue.
It’s not everyone’s style, but this works for me, and I’ve received positive feedback from folks over the years.
So, I’ll keep using this approach.