Top 5 Key Terms That VCs Look For In Funding Negotiations

‘Build your dreams, or someone else will hire you to build theirs’, is a popular phrase aspiring entrepreneurs live by and try to imbibe in their journey to become an entrepreneur. However, the roadmap to growing into a successful entrepreneur is arduous involving numerous difficulties demanding perfection on multiple fronts.

One of the most crucial aspects of starting one's entrepreneurial journey is to get funding for their startup. 

Venture capitalists, commonly referred to as VCs, are investors who seek to profit from the success of startups they support financially. However, obtaining funding from VCs entails more than just a polite request. The process involves a series of negotiations, contracts, and jargon that may be foreign to those unfamiliar with the startup industry. We're here to simplify the complex terminology and help you navigate the world of startup funding.

This article delves into the top five terms that hold the most weight in startup funding negotiations with VCs. Readers can expect a thorough explanation of each term's significance, meaning, and practical strategies for aligning with potential investors. Whether you're an entrepreneur seeking funding or simply curious about the startup funding landscape, this piece is a must-read. 

5 Key Terms That VCs Look For In Funding Negotiations

• Term Sheet 

When negotiating a startup funding deal, there are several key terms that venture capitalists (VCs) care about the most. These terms are outlined in a document called a term sheet, which can be either binding or non-binding. A binding term sheet means that both parties are legally obligated to follow the terms and conditions outlined in the document, while a non-binding term sheet is an agreement that outlines the terms and conditions of a potential investment, but the parties involved are not legally bound to follow through with the agreement.

• Voting Rights & Board Seat

Among the most important terms for VCs are voting rights and board seats. Voting rights give the investor the ability to influence important decisions in the company, while a board seat allows the investor to be a member of the company's board of directors, providing valuable expertise and resources to the company.

• Founder Vesting Period

A founder vesting period is also a common practice in startups, which involves a founder's shares being subject to a specific schedule over a period of time before they can be fully owned by the founder. This practice ensures that founders are committed to the business for at least a few years and helps to capitalize on their sweat equity.

• Liquidation Preferences

Liquidation preferences are another crucial aspect of startup funding negotiations, as they play a crucial role in determining how exit returns are distributed between investors and founders. A liquidation preference clause in a term sheet gives investors preferential payouts in the event of a liquidity event, such as the sale of the company.

• Right Of First Refusal

Lastly, venture capitalists often negotiate deals with startup founders that include a “right of first refusal” clause. This gives the VC the option to invest in future funding rounds before any other investors are offered the opportunity.

It is important for both founders and investors to carefully negotiate these terms to ensure that the interests of all parties are aligned and that the startup can achieve its growth and fundraising goals.