What matters most in an investment term sheet

The clauses that I’ll never give up on when discussing an investment

Provisions in a term sheet are either about control or valuation. As a side note: these must be in a fine equilibrium for the term sheet to be fair for all parties. If you are so keen on keeping the control as a founder, then you should agree to a lower valuation; also, you should be open to taking more responsibility if things go south, such as a harsher anti-dilution in favor of the investors. On the other hand, if the founders negotiate only with the valuation in mind, they should give investors some control over their newly acquired super-expensive asset.

Besides control and valuation, there are few other clauses in the term sheet: those about founders’ commitment. These are the contractual clauses that matter the most to me. Here are the things that I’ll never give up on:

The vesting plan

Nothing is more straightforward and more proof of commitment than founders vesting their interest in their own company. The typical four years vesting plan with one year of a cliff means that, if founders leave the company in the first year after raising money, they go home empty handed. They leave all shares in the company, as an incentive for new founders to join, work, and give their best for the company’s success. For each of the first four years dedicated to the company, the founders that stay will recuperate 25% of their shares — sometimes this is calculated on a quarterly basis (6.25% per quarter after the first year), sometimes even on a monthly basis (close to 2% per month after the first year), though I consider this a bit too granular.

Bottom line, when raising their first round, I expect founders to be all in. Nothing less is acceptable. It is just like with the ham omelet, where the chicken was involved while the pig was committed. I need the founders committed. Not negotiable.

The lock-up

We don’t invest for the short term; we are not a hedge fund, nor are we investing in distress companies to flip them for a quick sale or to liquidate their assets. We are in venture capital — which is all about building, about starting from almost nothing and getting to the unicorn status. Venture capital is about fulfilling potential, and following this path takes time. Here is where the lock-up clause comes in: founders are not allowed to sell their shares for at least two years. It is just another way of proving skin in the game and long term commitment: we are in this together, founders with 100% blood and sweat and investors with 100% cash, network, knowledge or anything else they may help with.

The anti-dilution

Sometimes things go wrong. Sometimes it is because of external causes such as market conditions, bad timing, or technology disruptions. Sometimes is the investors’ fault: they may be toxic or merely incompetent. But most of the time, is the founders that fuck up. And that’s a fact.

It may be a bit controversial, but this is how I look at things: as long as I do not take any operational role and leave the founders with full decision-making on all business matters, I also need the founders to take full responsibility for it. So, in a downturn scenario, the founders should take the hit — I ask for full ratchet anti-dilution.

Should I also have a say on operating the company — which I do not ask for; advising and serving in the board is more than enough for me — then I agree to take part of the loss. Here is where the weighted average anti-dilution comes into play.

As you see, the term sheet is like a dance in three: control, valuation, and commitment. As a founder, you need someone to lead and then you need balance, rhythm, and grace to get to the closing and sign the damn thing.