Investors are partners long after the contract is signed

Treat the term sheet negotiation as only a part of the total deal.

Many entrepreneurs may falsely conclude that, since the term sheet sets the rules of the investment contract, it is therefore the only important negotiation. Their efforts are isolated to a search for a VC who will offer a term sheet, then to gain a few term sheets to play off one another, and finally to negotiate every relevant section of the term sheet until they’re happy with the results. Success is a term sheet the entrepreneur likes, signed and in their hand. This is short-sighted.

What entrepreneurs need to understand when searching for investors is the length of relationship they can expect to have with the investor. That relationship is much longer than the completion of a term sheet negotiation. The relationship begins with the shopping, as the entrepreneur looks for investors that share interests with the entrepreneur’s startup. An entrepreneur with a new hair color product might look for investors who have made fashion and makeup investments in the past, or those with pink hair. Then comes one of several conversations and a demo to show the investor the opportunity and describe in detail the position of the company and it’s proposal. When the term sheet negotiations begin, it should be built upon a growing relationship and not the first conversation. After the term sheet is signed, the relationship continues. That investor influences future investors, may sit on the business' board of directors, and is more likely to fund future endeavors. The entrepreneur’s relationship with the investor could last for ten years or more.

Negotiations encourage myopic behavior. Worse, it may be either parties negotiating tactic to get the other to focus on the details and forget the relationship. An entrepreneur may walk out of term sheet negotiations with a feeling of victory, only to rue the day every hour since because their tactics destroyed the ongoing relationship with the investor. What investors know and entrepreneurs need to is that the term sheet, while important, is not the end of the conversation. Investors are wary with every new investment, but as their relationship continues and the startup that the entrepreneur pitched shows promise, opportunity arises to renegotiate. While this is no excuse to accept poor initial terms, it should keep the ongoing relationship front-of-mind and help the entrepreneur retain the important perspective of the relationship in the midst of a single heated negotiation.

This advice about negotiation is valuable in many spheres of life. Whether an argument with a spouse, a promotion negotiation with a boss, or a terms sheet battle, the party who maintains the relationship through the negotation is the truly wise and blessed individual. Investments, like marriage, are not isolated events that make no difference whether bridges are burned in the process. They are binding agreements with ongoing negotiations on a wide variety of topics. Don’t pin the whole war on a single battle - remember the desired outcome and compromise to retain a quality relationship over victory in a single drag-out fight.

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