Module 2:Negotiating Term Sheets

• Think Marriage, Not War
  • Key Concept: Economics + Control
• Leverage
• Who Are Early Stage Investors
• Investment Instruments
• SAFE + Convertible Note
  • Key Concept: The Two Key Levers
• Priced Rounds (Series Seed)
  • Economics
  • KeyConcept: Anti-Dilution
  • Control
• Technology-Specific Considerations
• Timeline of a Deal

A presentation by Jeffrey M. Glazer

Think Marriage, Not War

This is the start of a multi-year relationship. An overly aggressive negotiation can poison the well before you even start.

Fair Deal != Winning Deal Your investors are your partners. Their success is tied to yours. The goal is to find a “fair” deal, not a “winning” deal. A fair deal aligns incentives for everyone.

Key Concept: Economics + Control

Every term sheet boils down to two things and every provision of the term sheet can be lumped into one of these two categories. They are typically at tension with one another, you can’t get control without money; or, stated differently, more control costs more money. Founders should make sure they understand both the economics of the round, but also any red lines that they might have related to control.

• Economics: Who makes how much money and when?
• Control: Who gets to make what decisions?

Leverage

Competition Try to have more than 1 investor at the table. Your greatest source of leverage is a competitive process; having more than one investor at the table changes the entire dynamic. Similarly, don’t be desperate. Be out raising money before you are out of money.

Traction Show progress. Tell stories of actual customer discovery (customers are people who pay you that are not related to you), pilot programs, LOIs, key hires, IP filings. A successful pilot with a municipal or industrial partner is gold. People often put too much pressure here; ANY user is a user; sure paying users are BETTER, but any user (that isn’t related to you) is traction.

A quick note on customers v users: Customers are people who pay you. Users are people that use the product or service. They are not always the same person. For example, in social media you are not the customer, you are the user (or, more cynically, the product); the companies that pay for ads are the customers.

Narrative + Source/Use of Funds Know your pitch, but, more importantly, know your finances. How much do you need? What are you going to do with it? When and how much is the next round? How does this relate to your story and growth narrative? A detailed, credible use-of-funds plan builds confidence.

Golden Rule S/He who has the gold makes the rules. Unless you have something they can’t get anywhere else (what makes you defensibly unique?). What does the angel/fund care about? Financial return? Strategic advantage? Impact? Tailor your pitch accordingly.

Who Are Early Stage Investors

Angels Often successful local/regional entrepreneurs.

• May offer valuable mentorship and network access.
• Decision-making can be slower (by committee).
• Often more patient and potentially mission-aligned (important for water tech).

Super Angels High-net-worth individuals, often former founders or tech executives.

• Act like micro-VCs; write larger checks ($250k+).
• Decisions are fast. Can be demanding but also incredibly helpful.

Seed-stage Venture Capital Professional money managers.

• More structured, more demanding terms, but larger checks and deeper pockets for follow-on rounds.
• Typically enter at a slightly later stage (Series A), but some have Seed programs.

Investment Instruments

Un-Priced Rounds The company’s valuation is not set today. It’s kicked down the road.

• Simple Agreement for Future Equity (SAFE)
• Convertible Note: A loan that converts to equity

Priced Rounds The company’s valuation is set today. You are selling a specific percentage of your company for a specific dollar amount.

• Series Seed/Preferred
• Requires valuation

Other (Patient Capital)

• Royalty-Based Financing: Investor gets a percentage of revenue. Can be non-dilutive but may be a long-term drag on cash flow. More common for businesses with predictable revenue, less so for high-growth tech startups.
• Stock Buy-back Schedule

SAFE + Convertible Note

What’s the difference?

Terms common to both:

• Valuation Cap
• Discount Rate
• Pre/Post-Money (MFN)

Terms specific to convertible notes:

• Interest Rate
• Maturity Date

Key Concept: The Two Key Levers

Valuation Cap: The maximum valuation at which the investor’s money converts to equity. You want this to be higher; the investor wants it lower.

• Example: $1M SAFE with a $10M cap. If the next round is at $20M, the SAFE holder converts at the $10M price, effectively doubling their ownership stake compared to new investors.

Discount Rate: A discount the investor gets on the price of the next round. Typically 15-20%.

• Example: Next round is priced at $1.00/share. A 20% discount means the SAFE holder converts at $0.80/share.

Other Concepts:

Pre/Post-Money: Are you using a “Pre-Money” or “Post-Money” SAFE? Post-money SAFEs are investor-friendly and have become more common. They can be significantly more dilutive to founders. Understand the math!

MFN: The holder of an MFN instrument always gets the most favorable negotiated deal in the round.

• Example: Investor A has MFN; Investor B negotiates a 5% discount rate; Investor C negotiates a 20% discount rate. Investor A (all other things equal) will get Investor C’s 20% discount rate.

Convertible Note: is debt!!

• Interest Rate: A small interest rate (2-8%) that accrues and is added to the principal that converts to equity.
• Maturity Date: A date (typically 18-24 months) by which, if a priced round hasn’t occurred, the note is due.

Priced Rounds (Series Seed)

Even if you raise on a SAFE or other convertible interest for the purpose of punting on a valuation, it will eventually convert into this structure, so you need to understand it.

Economics

• Pre-Money Valuation + Amount Raised in Round = Post-Money Valuation
• Option Pool: The option pool (for future employees) is almost always created before the first major investment, reducing the founder’s effective valuation. Example: An investor agrees to a $10M “pre-money” valuation but requires a 20% option pool. The pool is created from the existing equity, so the true pre-money valuation of the company is now $8M. You can do the mental gymnastics to figure out why this is true.
• Liquidation Preferences
  • Modern Standard: 1x, Non-Participating. Investor gets the first money out in a sale—either their investment back OR their ownership percentage, whichever is greater.
  • No Longer Standard: Participating Preferred. The investor gets their money back AND their ownership percentage. This is a form of double-dipping and is no longer market standard for early rounds.
• Anti-Dilution (fully-diluted/tag along/drag along/ROFR)

KeyConcept: Anti-Dilution

Anti-dilution is a surprisingly difficult concept to implement. Let’s break down what’s really going on when an investor asks for “anti-dilution” provisions. First, what the investor is really asking is that as you are raising money their ownership percentage won’t change. So, if the investor owns 10% of the company (for sake of easy math, let’s just assume Investor A owns 10,000 shares of 100,000 total outstanding shares), when more money comes in, Investor A will continue to own 10% of the company. But, what does this really mean?

Example. Founder puts $90,000 in to ABC, Co. for $1/share. The next day Investor A puts in $10,000 for $1/share + “anti-dilution” protection. Quick-review: Pre-Money Valuation ($90,000) + Amount Raised in Round ($10,000) = Post-Money Valuation ($100,000). Therefore, Investor’s A ownership percentage = 10% ($10,000/$100,000). The next week, Investor B comes along and wants to put in $20,000 for $1/share. So, again, post-money valuation will equal $120,000.

The cap-table now looks like: Founder (90k shares) = 75%; Investor A (10k shares) = 8.33%; Investor B (20k shares) = 16.67%. But Investor A has “anti-dilution” percentage and needs to be brought up to 10%, but none of the valuations change. To get Investor A up to 10% ABC Co must issue new shares. ABC Co must give Investor A another 2,204 shares to account for the anti-dilution requirement. Here’s the math:

120k / (1.00-(.1 - .0833)) or
120,000 total shares / .9833 = 122,038 total shares outstanding
122,038 * 10% = 2,203.8
round up to avoid fractional shares = 2,204 additional shares.

New, New capt-table: Founder: 73.77%; Investor A: 10.00%; Investor B: 16.39% (this totals 100.16 because I rounded to the nearest 100th)

TAX NOTE: ABC, Co will “grant” these 2,204 shares to Investor A; since Investor A isn’t paying for these shares, the grant also creates taxable income for Investor A in the amount of $2,204 (at $1/share)

The usual ways around this are for the company NOT to grant more shares to Investor A, but rather provide rights that allow the Investor to maintain their ownership percentage such tag-along rights or rights of first refusal.

Control

• Board Seats: Control often starts here. A typical 3-person seed stage board: 1 Founder Seat, 1 Investor Seat, 1 Independent Seat (mutually agreed upon). In many cases, the company might have 2 founders instead of an independent seat until the Board is expanded to 5 a little later in the company’s corporate existence. A Board Observer is someone that is permitted to attend Board meetings and receives Board updates and documents, but does not have a formal vote on Board decisions.
• Veto Rights: Investors may demand a list of major corporate actions that require investor approval (a “veto right”). These might include major corporate decisions such as: selling the company, changing the articles of incorporation, issuing senior stock, and taking on significant debt. It would be unusual (and thus scrutinized heavily before agreeing) for vetoes over operational decisions like hiring or firing executives, annual budgets, or pivoting the business.
• Voting Rights: Can take many forms, but most frequently might look like Super-voting Rights (each share is worth more than 1 vote) or Non-voting Rights (shares do not carry voting rights)

Technology-Specific Considerations

Time + Money: For some technologies (e.g., pharma) startup costs can be particularly high because of high equipment/lab costs (BioTech), tooling costs (HardTech/AgTech), service costs (AI), or build-out costs (AgriTourism/Food&Bev). For others, development timelines (Pharma) or sales timelines (EdTech/GovTech) can be particularly long. The impacts of these marginal costs need to be known and accounted-for from the very beginning. For high-costs, this means rounds will be bigger to fund higher burn-rates; for long timelines this means rounds need to fund longer runways.

Intellectual Property: All industries have IP. Some are strongly patent protected (pharma, hardtech), others are strongly copyright protected (software, services). In others trade secrets are incredibly important (food). All have trademark issues. Investors want to know that the company’s founders understand what IP the company owns and have a coherent and comprensive strategy for acquiring and leveraging it.

Regulatory: Some industries have high regulatory hurdles. As an easy and obvious example, drugs and medical devices need FDA approval which can take years to get through multiple rounds of human and non-human trials. Good investors will understand and price this risk. Having a clear, credible plan for navigating the regulatory landscape and a team that has gone through it before de-risks the investment.

Mission-Aligned: The “impact” investor universe can be challenging. The good news is that the right investor is often looking for the right solution for reasons that are not strictly financial. The bad news is finding that fit can be hard and very time consuming. Seek out investors who understand the problem and the technology and share your long-term vision. While these investors can be more patient and provide more relevant strategic value, there are far fewer of them and they get a lot of deals to look at.

Timeline of a Deal

1. Introduction/Pitch/Relationship Building: Think in ROUNDS, not DEALS
2. Term Sheet Signed: Term sheets are mostly non-binding, but they create moral commitment. Exclusivity (“no-shop”) and confidentiality clauses are usually binding.
3. Due Diligence: The investor’s lawyers and analysts will verify everything. Financials, technology, legal structure, customer contracts, etc. Be organized!
4. Document Drafting: The term sheet is expanded into lengthy, binding legal contracts. A lawyer should handle the heavy lifting.
5. Closing: You sign a mountain of paperwork.
6. ???
7. Profit (cash that check, yo!)