Eight-Step Guide
1.Eliminate bad eggs early.
The vast majorities of VCs are decent human beings and really want entrepreneurs to be successful.Their first duty, of course, is to their investors (and so your interests may not always align), but withinthat limitation they tend to be reasonable negotiators. But bad ones are out there. Eliminate themearly.
2. Understand term sheet fundamentals.
You'll need a good business advisor, and you'll need a lawyer for a final check, but you also need tounderstand the fundamentals yourself. Don't let yourself be confused by a lawyer because you don'tknow what "liquidation preference," "right of first refusal," or "drag along/tag along" means. Don'twaste your business advisor's time asking them to explain the basics.
3. Get a good business advisor.
You'll need an experienced entrepreneur who can help you decide what is critical (a deal-stopper)and what you can concede. Some lawyers will wade too deep into the legalese weeds and fight onpoints out of professional pride. You'll need someone to help you make the big judgment calls.
4. Be proactive in your reference checks.
This comes after the term sheet has been signed but before the contract. VCs do reference checkson you, and you should do the same to them. Don't worry, they won't be insulted... unless they arebad eggs that slipped through your first filter, in which case this is a great place to catch them. Bybeing proactive, we mean selecting three companies in their portfolio to connect with. You could askthe VC for an introduction, but use your own network to connect as well.
5. Be reasonable.
If a VC sees dig-in-your-heels posturing on minor issues, they will either walk away or show you whoreally is the experienced negotiator with clout at the table. If you and your business advisor think anissue is a deal-stopper, calmly tell the VC why you think so. The VC would almost certainly haveseen this issue before and would likely have a workaround.
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