Quick Guide To

Navigating
Venture Capital
Term Sheet
Negotiations

by Ezekiel Kwenda, FCCA
Introduction
What is a Venture Capital Term Sheet?
Mistake #1: Lack of preparation
Mistake #2: Focusing Only on Valuation
Mistake #3: Ignoring the impact of pre and post money valuation
Mistake #4: Giving away too much control
Mistake #5: Ignoring protective provisions
Mistake #6: Ignoring the Fine Print
Mistake #7: Neglecting the impact of liquidation preferences
Mistake #8: Ignoring terms related to future funding rounds
Mistake #9: Not Understanding Control and Governance
Mistake #10: Failing to Consider Exit Scenarios
Conclusion
Introduction
This write-up delves into ten venture capital term sheets
errors entrepreneurs typically commit during
negotiations. I will explore various aspects, such as
valuation, control, and governance. Get prepared for an
engaging and enlightening discussion!
What is a Venture Capital Term
Sheet?
A venture capital term sheet is a document that outlines
the terms and conditions of an investment made by a
venture capitalist. It includes details such as the amount
of money being invested, the valuation of the company,
and the rights and protections that the investors will
receive in exchange for their investment.
The importance of a term sheet cannot be overstated. It
sets the stage for the entire fundraising process and can
significantly impact the company's future success. A
well-negotiated term sheet can help ensure that the
interests of both the investors and the founders are
protected, while a poorly negotiated one can lead to
conflicts and even the failure of the company.
Mistake #1: Lack of preparation
Inadequate preparation can lead to missed opportunities
and unfavorable terms that could have been avoided
with proper planning.
Preparation involves researching the market,
understanding the investor's goals and preferences, and
having a clear idea of your own goals and priorities. It
also means being familiar with a term sheet's standard
terms and provisions, so you can effectively negotiate
for the best deal possible.
Mistake #2: Focusing Only on
Valuation
One of the biggest mistakes that entrepreneurs make
when negotiating a venture capital term sheet is
focusing only on valuation. While valuation is certainly an
important factor, it is not the only one that should be
taken into consideration.
By solely focusing on valuation, entrepreneurs may
overlook other crucial terms and provisions in the term
sheet that could have a significant impact on their
business down the line. For example, protective
provisions, liquidation preferences, and control and
governance terms are all important factors to consider
when negotiating a term sheet.
Mistake #3: Ignoring the impact
of pre and post money valuation
The distinction of pre and post money valuation is
critical in negotiations with investors. Pre-money
valuation refers to the value of a company before any
investment is made, while post-money valuation refers
to the value of the company after the investment has
been made. It's important to understand how these
valuations can affect the ownership percentage of the
company and the dilution of shares. The distinction
between pre-money and post-money valuation has a
significant impact on entrepreneurs in venture capital
financing rounds. It affects the ownership stake of the
entrepreneurs, dilution of their equity, and the overall
valuation of the company. Here's how it affects
entrepreneurs:

1. Equity Ownership: The pre-money valuation
determines the ownership percentage that new
investors receive, impacting entrepreneurs'
ownership stake and control in the company.
2. Dilution of Equity: When new investments are made
at a higher valuation, it leads to the issuance of new
shares, diluting the ownership stake of existing
shareholders, including entrepreneurs. Dilution must
be considered for its impact on ownership, control,
and future fundraising.
3. Valuation Perception: A higher pre-money valuation
signals market confidence and value creation,
positively impacting the company's reputation,
attractiveness to investors, and ability to negotiate
favorable terms. Conversely, a lower valuation may
pose challenges.
4. Negotiating Power: The pre-money valuation affects
entrepreneurs' negotiating power in subsequent
funding rounds. A higher valuation strengthens their
position, maintaining a larger ownership stake and
potentially reducing dilution in future financing.
5. Founder Incentives: The pre-money valuation
influences the value of equity incentives granted to
founders and employees. A higher valuation can lead
to more valuable stock options and equity incentives,
aiding in talent attraction and retention while aligning
interests with company growth.
Ignoring pre and post money valuation can lead to
unintended consequences, such as giving away too
much equity or not raising enough capital to meet the
company's needs. Understanding the distinction
between pre and post-money valuation is crucial for
entrepreneurs as it directly affects their ownership,
control, negotiating power, and incentives.
Mistake #4: Giving away too
much control
While it may be tempting to accept any terms to secure
funding, it's important to remember that the terms you
agree to will significantly impact your company's future.
Giving away too much control can lead to a loss of
decision-making power and even risk your company's
survival. Before agreeing to anything, it's important to
consider the terms related to board composition, voting
rights, and other governance issues.
Mistake #5: Ignoring protective
provisions
Protective provisions are essential clauses in a term
sheet. They provide investors with certain rights and
protections. These provisions include veto power over
major decisions, the ability to block future financings,
and the right to receive specific financial information
from the company.
It would be unwise for founders to overlook these
provisions, as doing so may restrict their decision-
making abilities and hurt the company's success in the
long run. It's crucial to thoroughly assess these
provisions and engage in negotiations to ensure a fair
balance between the interests of the investors and
founders.
Mistake #6: Ignoring the Fine
Print
While it may be tempting to skim over the details of a
venture capital term sheet, ignoring the fine print can
have serious consequences. The devil is in the details, as
they say, and it's important to understand exactly what
you're agreeing to before signing on the dotted line.
One common mistake is failing to comprehend the legal
language used in the document fully. Terms like
"warrants," "drag-along rights," and "anti-dilution
provisions" may sound like jargon, but they can have
significant implications for your business. If unsure about
any part of the term sheet, it is crucial to seek
professional advice.
Mistake #7: Neglecting the
impact of liquidation preferences
Liquidation preferences determine how proceeds from a
sale or liquidation of the company are distributed among
investors. If you ignore this, you could have very little
money after a sale.
Liquidation preferences can be structured in different
ways, such as participating or non-participating, and can
significantly impact your company's valuation.
Understanding these terms and negotiating them
carefully is important to ensure you're not giving away
too much control or leaving yourself vulnerable to
unfavorable outcomes.
Mistake #8: Ignoring terms
related to future funding rounds
Ignoring the terms related to future funding rounds can
have significant consequences, as these terms can
impact the company's ability to raise additional funds
and dilute the ownership of existing shareholders.
Investors may include preemptive rights, anti-dilution
protection, or participation rights in the term sheet.
Founders need to understand these terms and negotiate
them carefully to ensure they are not giving away too
much control or limiting their options for future
fundraising.
Mistake #9: Not Understanding
Control and Governance
Control and governance are critical elements of any
venture capital term sheet. Without a clear
understanding of these terms, you could end up giving
away more control than you intended, or worse, lose
control of your company altogether.
Control provisions can include things like board
composition, voting rights, and veto power over certain
decisions. It's important to carefully consider these
provisions and negotiate for terms that give you the level
of control you're comfortable with.
Mistake #10: Failing to Consider
Exit Scenarios
It's important to clearly understand the different exit
options available and their implications for the company
and its investors.
When considering these exit options, it's essential to
assess their implications. Factors to consider include the
potential valuation and returns for investors, the time
horizon for achieving an exit, regulatory requirements,
the impact on the company's future direction, and the
preferences of the investors.
Entrepreneurs should carefully weigh these factors and
consider the long-term implications for the company and
its stakeholders. It's crucial to align the chosen exit
option with the company's strategic objectives and
ensure it maximizes value for investors and founders.
By understanding the different exit options and their
implications, entrepreneurs can make informed
decisions and work towards achieving a successful and
rewarding exit for all parties involved.
Conclusion
In summary, negotiating a venture capital term sheet can
be a complex process with many potential pitfalls. By
avoiding the common mistakes outlined in this
document, you can increase your chances of securing
favorable terms for your startup.
Remember to prepare thoroughly, consider all aspects of
the deal beyond just valuation, and pay close attention to
the fine print. Don't give away too much control, and
make sure you understand the impact of protective
provisions, liquidation preferences, and future funding
rounds. Finally, think carefully about governance and exit
scenarios.
I hope you found this presentation informative and
useful. Please don't hesitate to reach out if you have any
further questions or would like to discuss these topics in
more detail.

Ezekiel is a certified charted accountant with 10 years of post-qualifying experience in investment management,
corporate finance, and accounting. He has worked in Zimbabwe, the USA, Qatar, and Saudi Arabia in renowned
global companies that include PricewaterhouseCoopers, Deloitte and Touche, Grant Thornton, and most
recently, Saudi Aramco's 500 million dollar venture capital firm, Wa'ed Ventures, where he is an investment
manager. He has worked on projects in various industries, including Oil and Gas, Utilities, Telecoms, Gaming,
FMCG, Mining, Real Estate, Banking and Insurance, Agriculture, E-Commerce, Logistics, and Fulfillment.