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- Get comfortable with your potential investor. The identity of the investor is the most important item of a term sheet, and can make or break a relationship.
- Be prepared to share control and information, and to listen. People who think they know it all – don’t.
- Realize that valuation is only a component of an economic deal. Unrealistic expectations are often an excuse for investors to move on. Preferences can have a more material economic impact than valuation.
- Non-economic issues can be more important in the long run, such as veto rights, ability to influence exit, control over new investors, etc.
- Have your corporate ducks in order. The simpler your cap table – the better. Missing documents, missing shares, missing minutes, too many outstanding options – all could be the kiss of death.
- Make sure your IP and confidential information are protected. NDAs and Assignment of Technology Agreements are a must.
- Don’t underestimate or overestimate the importance of patent protection. Don’t kill it by premature disclosure, but don’t think having a patent makes you invincible.
- Understand the Pros and Cons of Convertible Debt. What happens if there is no triggering event? Will future institutional investors like it?
- Have a general understanding of the lingo: full ratchet vs. weighted average; participating preferred; bring-along and tag-along, etc. But remember – only a fool has himself as his lawyer.
- Understand how decisions are made: the role of the board vs. the role of the shareholders; where protective provisions reside; the impact of fiduciary duties.
