Recently, HDFC Captial announced to build a Rs 1000 crore platform for a few development projects, TVS Emerald agreed to come on board as an investor by signing a term sheet with HDFC Capital.
Here, the term sheet is the legal document where HDFC Capital and TVS Emerald have outlined the deal terms. It outlines in detail how much money TVS Emerald as an investor shall be putting in for HDFC Capital.
As you are a company, hence you must familiarize yourself with different ways to negotiate a term sheet. During the entire funding process, you should be transparent & clear to have a productive investor relationship.
A few practical points that you should keep in mind when you are going to negotiate for a term sheet are:
Have more than 1 VC onboard:
The founders start leveraging when they have multiple term sheets. As a founder, you should impress multiple investors with your ideas. Once you analogise offers and negotiate with VCs, you will have a term sheet ready.
Consider your authorities:
Once you have decided to have multiple VCs onboard, their demands will be considered more credible. As you receive interest from several VCs, it will be easy for you to negotiate clauses.
Beware of red flags:
Before you start negotiating for a term sheet, become familiar with common market terms firsts. It will help you to identify red flags and make revisions on the spot. A few common red flags can be undisclosed changes in management, review periods, and guaranteed exits among others. Before signing, consider what you’re willing to compromise on and what can be addressed through communication.
Understand your value proposition:
Prepare a transparent and persuasive value proposition for your entity. Identify the problem to be solved, competitive advantages, market options, along with traction that you intend to achieve. Your business should be scalable and should elaborate on how to generate profit and revenue.
Look out for important terms while negotiating:
When you have started the negotiations for the term sheet, then communicate your finance needs to the VCs. Both parties should agree on how they intend to issue stocks and the rights they shall be getting. Try going for non-participating liquidation preference.
