By Alex Harris
Fundraising is certainly not necessary for all businesses. In fact, institutional money only accounts for a small fraction of the total funds available to businesses and in most cases is very hard to obtain.
This particular class touches on the subject of termsheets but, in reality, the termsheets themselves are intrinsically associated with the act of fundraising institutional money to the point that there is hardly any separation but that of procedural stage.
So what happens before a termsheet is issued?
Most likely a business has gone through the following stages:
● Identified that money is the only constraint
● Decided that equity financing is the best way to fundraise
● Conducted research in order to identify the right investors
● Produced fundraising collateral including data room for due diligence
● Pitched, improved, and iterated
● Successfully gone through due diligence
● Got an investor interested enough to issue a termsheet
The process itself is not for the faint of heart. It's long, arduous and entrepreneurs will hear a lot of “no’s” along the way. In fact, there are typically overwhelmingly more negative responses than there are positive.
Of course emotions run high.
And when it comes to negotiating a termsheet it's better to understand your options early on so that emotion does not become the main guide during the conversation with the investors.
During the class we covered some of these pitfalls and had an opportunity to listen to both founders and investors.
In preparation for the class
The SLP is an incredibly supportive network so I was able to benefit from advice from fellows who had run the same class in the past as well as the network of alumni and trustees.
I was very conscious that the class was taking place right after the Christmas break so I briefed all participants well in advance and kept communicating often all the way into the lead up to the class.
The guests consisted of two experienced VCs, two post series A founders and one deal facilitator. All participants had either “seen” a lot of deals or they were a founder and had lived to tell the tale.
I provided information about the structure and the format of the day well in advance and made sure everyone knew when and where they needed to be.
Naturally, in 2021, the COVID-19 pandemic meant that everything was taking place virtually which in itself was a challenge.
What happened on the day
I opted for an open Q&A format. The reasoning was that it's easy to read the theory of termsheet negotiations, however, often reality can be very different.
Luckily, everyone showed up on time. Here is the note that was circulated in advance.
The Termsheets session:
The purpose of this session is to introduce founders to key concepts of a term sheet and fundraising process as well as present the perspectives of both sides of the negotiating table.
Here is the plan:
Introduction to the class, wins of the week, what are termsheets / typical fundraising process
Participating: The cohort and legal facilitator
From the perspective of VCs
Participating: The cohort and VCs
Discussions: What are some common early mistakes that make a startup univestable?
What is a common reason startups fail due diligence?
What are some key steps we can take to set ourselves up for future fundraising success?
From the perspective of the founder
Participating: The cohort and guest founders
Discussions: How should we approach early stage fundraising? Important terms to get right. Have you made any early mistakes that came back to haunt you?
Class wrap up, thoughts about terms
Participating: The cohort
Admittedly the conversation was very active and it was a challenge sticking to the program.
What did we learn?
Simplicity is key, especially for early rounds. The more complexity is introduced, the more challenging it can be to untangle later. At the extreme this can scare off investors.
Focus less on valuation and more on control. Most founders tend to be too wedded to their valuation figures but in reality they should be focusing their negotiation energy on things like board composition, drag and tag as well as preferences.
Once you are looking to raise an institutional round you have to seriously consider investing into a grown up lawyer with domain expertise. It will cost you in the early days, but this is not the place to scimp.
Message to the class of 2022
I hope the world is in a better place and that you can conduct your class in person. Try to keep it as simple as possible. There will always be fellows for whom this class is either coming to early or is simply not applicable at all, therefore don't get too academic.
Most likely you will have to cover a few basics on fundraising as it's a very closely related matter that some in the room might not be familiar with.
Most importantly, don't hesitate to reach out to the SLP network for support. Former class CEOs, trustees, alumni are all here to help so please take advantage of the wonderful people and resources in place.
Finally, don't forget, timing is important especially for the first class of the year. You will need to be organised and chase.
Best of luck