Here is step 11 of The Fifteen Step Process to Raising Venture Capital: The Term Sheet Negotiation. Later on this week I will post steps 12 and 13 (The Term Sheet Signing, The Full Due Diligence Process).

11. The Term Sheet Negotiation: Once you have reviewed the term sheet with your attorney, have a follow-up conversation with the partner or associate you are dealing with to negotiate the term sheet. Make sure you know which terms are the most important to you going into any negotiation (generally the valuation, option pool size, liquidation preference, participating preferred, founder revesting, and preferred stock veto rights). You may wish to have your attorney (or CFO if you have one) negotiate the finer points directly with the firm’s attorney. At this point it is critical to have a top tier venture attorney on your side. These attorneys generally bill between $250 and $500 per hour depending on their experience and the market. Your negotiating power will be based upon:

1.  how much you need the money;
2. the reputation of the firm;
3. your reputation as an entrepreneur;
4. any past successes you’ve had;
5. your experience;
6. the quality of your management team;
7. the members of your advisory panel;
8. the size of your addressable market;
9. your market timing;
10. the quality of your technology and IP;
11. your ability to walk away; and
12. whether you have other competing term sheets.

Know that it is generally taboo to provide specifics to one firm about another firm’s term sheet, but you can often provide generalities or refer to wanting to have a competitive process in order to have more power in negotiating the term sheet. Do not sign the term sheet until you have negotiated it to your satisfaction and your attorney approves signing it. Once you sign a term sheet, it is very difficult to negotiate any changes in the final document. If you can create a parallel process and receive multiple term sheets you will have more power. It often will take three or four negotiation iterations to get a term sheet both sides are happy with. It can take a lot of time (and a few thousand dollars of attorney fees) to effectively accomplish this—and may be impossible without the right experience and revenues. We were unable to create a truly competitive process during our seed round, but did accomplish a competitive round in our Series A after we had $6 million in annual revenues, great technology, and rapid growth. While it can take six to eight weeks after the first meeting to get a term sheet from a venture firm traditionally, once you have an existing term sheet you may be able to get competing term sheets in as little as one to two weeks. Group mentality does at times take hold, causing the valuation to be bid up with multiple players in the deal and some of the secondary terms to be softened. This noted, at some point it can be unhealthy to push the valuation up. The highest bidders are not always the best firm for you to work with.