Unpacking your first venture term sheet

If you don't know what to expect from your first term sheet, you risk signing something that will come back to haunt you, or blowing up a good deal over a clause that's entirely standard. But if you've done your homework, you'll know what to push back on, what to let go, and how to end up with the best terms for your business.

Leo Banchik is a partner at Voyager Ventures. We sat down with him to discuss how to create leverage, red flags you should look out for, and tactics for negotiating.

Before the term sheet arrives

1. Get a sense of the market
Ask your lawyers what terms they’re typically seeing. Then, talk to a handful (ideally 5-10) other founders who've raised recently to ask about their term sheets and what surprised them. If you know what terms other founders pushed back on and what they ended up accepting, you'll go into negotiations with a much stronger footing.

2. Lawyer up
Look for VC-experienced counsel who’ve worked with early-stage companies — not M&A lawyers or generalists. They should know corporate securities law, understand how priced rounds are constructed, and know how to file the right paperwork.

3. Keep everyone in the loop
Make sure your board, lawyers, and co-founders are informed and updated throughout the raise. The last thing you want is for a term sheet to arrive with a 72-hour signing window and a board member is on vacation, or your lawyers are tied up on another deal. Watch out for signals from investors about timing — like when their investment committee is scheduled to decide — and feed that back to the people who'll need to act quickly when the moment comes.

4. Get ahead to gain leverage
Before a term sheet arrives, your job is to create leverage. That means having other investors at the right stage of diligence who can move quickly, and letting them know that a decision is on the way.

Don’t bluff and say you have a term sheet coming tomorrow, because if it doesn’t, you’ve shown your hand. Instead, if one is inbound, tell others you expect one from your most interested lead in the coming days – this is often enough to create FOMO, though it's not guaranteed.

You don’t need to – and shouldn’t – share who the lead is. If pushed, a simple "we like them" is enough, but if you want to turn up the heat — and only if it's true — you can hint that it's a tier-one or a generalist fund. You can also distinguish between institutional and strategic investors if pressed, but be careful: saying it's a strategic lead at the seed stage risks showing that the institutionals didn’t bite. 

Then, when the term sheet does come through, you’ll hopefully be able to get another term sheet or final IC meeting scheduled immediately. Speed is crucial because term sheets can come with a 24 to 72-hour signature period, though this can be negotiable if the investor has developed real conviction.

What to look out for in the term sheet

1. Round size
The first substantive thing to look at is the round size, and whether it hits what you were targeting. This means doing the work upfront to make sure you're talking to investors who can actually participate - right check size, right stage, right sector fit. There's no point optimizing for valuation with a fund that writes $250K checks when you need a $3M lead. If an investor can only write a small follower check, they should not be issuing you a term sheet; keep them warm – they can help fill the round later – but prioritize finding a lead.

2. Valuation 
The average VC-founder relationship lasts longer than the average American marriage, so don’t make your choices based on valuation alone. Make sure you actually like the partner you'll be working with - not just the fund's brand. Taking too high a valuation can also mean shooting yourself in the foot – you'll have two to three years of runway to grow into it, and if you don't, you’ll be looking at a down round.

3. Closing conditions
Your term sheet might include tranches: a second or even third close that's milestone-based. Unless you have the full round constructed, negotiating multiple closings can let you get some money in the door and avoid the pressure of a single-close raise when you're low on cash. If you're not doing a priced round, a SAFE is the more common alternative: it lets you raise quickly without setting a fixed valuation. Just watch out for SAFE stacking; layering multiple SAFEs at escalating caps can sometimes result in more dilution than is expected, catching founders off guard when they eventually get to a priced round.

4. A co-lead
Check the term sheet for a stipulated co-lead. Even if you already have followers ready to fill the round, your lead will have views on who they work well with, and a good one will have flagged their preferred co-investors along the way. Leads will also often want input on the broader syndicate - who fills the round matters to them, and a good lead will have opinions worth hearing. That said, it's a conversation, not intended to be a unilateral call, so make sure expectations are aligned early so there are no surprises when you're moving quickly to close.

5. ESOP expansion
The Employee Stock Option Pool (ESOP) will typically need to be expanded to between 8 to 12%, allowing you to incentivize new hires. Model out the hires you need to make to hit your milestones for the next round, figure out how many options that requires, and then leave a buffer. If you underestimate and need to expand the option pool later, everyone’s shares get diluted, including the VC’s, so it's in your interest to size it right from the start.

6. Board composition
In any priced round there'll be a board, so you’ll need to look at how many members there are and whether any are independents. At seed, a typical three-person board would be two co-founders and the lead. At Series A, you might have a five-person board: say, two co-founders, the lead, the largest shareholder, and an independent. It’s also important to look at whether you’ll retain control as a founder, which should always be the case unless something has gone seriously wrong. 

7. Major investor status
The lead will often have major investor status, which gives them pro-rata rights, information rights, and occasionally more. In general, major investor status falls away at some point - typically once their ownership or share count drops below a certain threshold. Whether they get diluted down naturally over future rounds, or they sell their shares, there should be a clear graduation point.

8. Legal fees
You'll typically pay for the lead investor's legal fees out of the capital raised at close. This might feel unfair, but if you've just raised $5M, tens of thousands of dollars is a reasonable trade-off. That said, make sure the term sheet includes a reasonable cap, or else negotiate one – you don't want your VC using expensive counsel for a straightforward deal and handing you a $100K legal bill. 

9. Revesting
If your business has been up and running for four years and you’re fully vested, a VC may want you to re-vest a portion of your shares over a further two to four years – essentially, they want to know you’re in it for the long run. This shouldn't be a problem in principle if you’re committed to your business, but it's worth knowing it exists. If it does show up - whether in the term sheet or later in closing docs - it's worth understanding the terms carefully before signing rather than treating it as a dealbreaker. 

10. Excessive control rights
Some VCs will want the final say on decisions like every hire above a certain comp level. Especially at seed, you need to be careful what you accept, but think through what this will look like in practice before you push back too hard. You probably don’t want your lead investor having veto authority over hires, but giving them the right to weigh in shouldn’t be a problem. 

Plus, be aware of the distinctions between board approval, shareholder approval, and major investor approval, because they can play out very differently. Board approval is the most common.

Negotiating tactics

1. Don’t rush to sign
The moment you sign the term sheet, your negotiating leverage drops, but up until that point, you can push back and propose changes. So, once you get the term sheet, delay as long as needed by asking questions about specific terms. This may push you past the expiration date, but most investors will be flexible on that front, and will buy you more time to evaluate other options - and that leverage compounds meaningfully if multiple leads are engaged and have shared competing term sheets.

2. Horse trading
When you’re finalizing things, you'll likely end up with a handful of sticking points. The goal is to work together and be explicit: say, A and B matter more to me than C and D. Then the investor can say, C and D matter more to me than A and B – and you can trade.

Some of what you're negotiating will be edge cases you may never encounter if everything goes well, but this doesn’t mean they don’t matter, so make sure you understand what’s on the table.

3. Don't share the term sheet
To avoid influencing other investors’ thinking, don’t ever forward them a term sheet from a competitor, even anonymized. If they ask about valuation or round size, you can simply say it's a figure you're comfortable with – unless it’s truly stellar and you want them to match it. 

Leo Banchik is a partner at Voyager Ventures. He brings two decades of climate tech experience across consulting, startups, research, and policy. He joined Voyager from Global Founders Capital, where he led GFC's global climate and deep tech investing. Prior to GFC, Leo drove sustainable investing and energy transition strategy engagements at McKinsey, and led product innovation at advanced desalination startup Sandymount. He holds a PhD in Mechanical Engineering from MIT, where he was an NSF Fellow focused on energy efficient desalination, and began his career as a scientist at two National Labs and a researcher at the Department of Energy's Office of Energy Efficiency and Renewable Energy. A graduate of MIT and UNLV, Leo lives in San Francisco with his wife and two children.