Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.
In negotiating the terms of a startup investment, the investor should develop a standard terms sheet and modify it for each deal.
In going into due diligence, send the terms sheet to the startup for their review. In some cases, they may be unfamiliar with terms sheets and need time to study it.
The key elements to consider in negotiating terms are as follows:
Valuation — this is the most critical term to negotiate as it has the biggest impact on returns.
Vesting founders shares — it’s important to unvest founders shares and have them revest over the next few years. If the founder leaves early, there are shares to compensate for the replacement.
Option pool — set up to offer options to the employees. If you don’t have an option pool, then you have to provide all compensation out of cash which is a hard way to run a business.
Board of directors — set up a board with proper governance.
Liquidation preference — consider including a liquidation preference to set a floor on your return.
Growth strategy — gain consensus with the team and the investors on the growth strategy. Are we hitting the gas and going for the moon, or are we growing it carefully? This is often a sticking point that comes up after the investment is made.
Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.
Let’s go startup something today.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.