Forest for the Trees

Last night I had the fun honor of speaking to 40-odd startup founders on the 46th floor of the Cooley LLP office over Manhattan's Bryant Park. Along with Charlie O'Donnell of Brooklyn Bridge Ventures, and Kanyi Maqubela of Collaborative Fund, we walked through a mock term sheet negotiation, and provided guidance on the mechanics of venture capital. Term sheets create the baselines for negotiation. What's important is to see the forest for the trees. Rather than get caught up in negotiating dividend rates, think about what's important: Investment, implied valuation, control, liquidation preference, option pool to hire employees, etc. Generally term sheets are pretty vanilla –meaning non-participating, non-punitive liquidation preference, four year vesting, etc– but the details do matter, especially in downside scenarios. Big money and high valuations may give pop to a TechCrunch article, but forward valuations usually come with hidden gems in the term sheet, ways the investor is protecting their downside. When market dynamics change, flat or down rounds hit, or the company has to sell, liquidation preferences and participating preferred stock can often eliminate founder and employee gains. Term sheets matter, but should be viewed from 60,000 feet as a way to align incentives between investors, founders, and future employees.