Before Fundraise: Allow minimum three to six months to raise money. Have a clean cut from last job to avoid IP disputes. Prepare data site (Certificate of Incorporation, Bylaws, board minutes, cap table, customer list, product roadmap, org chart, employment agreements, budgets, financial statements). Some VC deals fail to close because of one missing IP assignment agreement. If you want money, ask for advice. Develop relationships with VC before fundraising. Research & make the outreach personal. Find mentors, not fundraising advisors asking for a cut.

During Fundraise: Do not email a teaser, hoping to share more in meeting. Whatever you send a VC may be your last, so send the full yet concise pitch. The presentation is to communicate the same info in the executive summary but with more examples and visuals. Aim for 10 slides or fewer. Offer a prototype or demo that VC can interact. Demo is the best way to show your vision. Watch VC reactions during demo. Did their eyes light up? Do they understand the domain? Raise enough to get to the next milestone, plus buffer. Hire experienced startup lawyer with fee cap. Don’t let VC talk you out of your lawyer choice. After you’ve had a second meeting, ask what the process is going forward. Get multiple term sheets to create competition. If a VC passes, insist on feedback, which improves your next pitch.

Decision Maker: Have a lead investor representing the entire syndicate. If party round, set up a special-purpose limited partnership, not to chase down 75 signatures. At every VC, find out & talk to the decision makers. Reference check the VC: founders who went through hard times, like fired as CEO, learn how the VC handled tough situations. Add more to data site, but watch out for busywork that associates assigns, and the risk of leaking to a competing portco. Again, make sure decision makers are involved.

Option Pool: Typical size of early-stage company option pool is 10% to 20%. Smaller pools for later stage. “We have enough options to cover our needs. If we need to expand the pool before the next financing, we will provide full antidilution protection for you.” VCs want to minimize future dilution by enlarging the option pool up front. Founders should push back with an option budget that lists out futures hires until next financing and the option grant to land each hire.

Liquidation Preference: In early stage, it’s in the best interest of both VC and founder to have a simple liquidation preference and no participation. In future rounds, the terms are often inherited from the early stage terms. If the seed investor doesn’t invest in future rounds, his economics in many outcomes could be worse with participating and end up looking like the common holders (in terms of returns), since their preference amounts are so small.

Pay to Play: Investors must invest pro-ratably in future financings (paying) not to have their preferred stock converted to common (playing) or lose anti-dilution rights. Not a lifetime guarantee but an incentive to follow on, if other investors decide to invest in next round. Pay to play reduces liquidation preferences for the nonparticipating investors and ensures only committed investors have preferred stock. If VC pushes back, “Why? Are you not going to fund the company in the future if other investors agree to?” Avoid the pay-to-play scenario where VC has the right to force a recapitalization (e.g. financing at a $0 pre-money valuation) if fellow investors don’t play in the new round.

Founder Vesting: Negociate to treat vesting as a clawback with an 83(b) election. Single-trigger: accelerated vesting upon M&A. Double-trigger: accelerated vesting upon M&A and being fired. Balanced approach: double trigger with one-year acceleration.

Anti-Dilution: protect prior investors in a down round (equity issued at lower price). Flavors: weighted average (normal), or full ratchet (rare; reduce earlier round price to new price). Antidilution is often implemented as a price reduction for conversion to common. More exceptions in antidilution carve-outs, the better for founders.

Board: Be wary of observers. Question what values they bring. Often they are associates. Sometimes they disclose board topics to brag to their friends. Get a small board. Independent board members usually get stock options 0.25% to 0.5% vest over 2 to 4 years. Observers don’t get options. Instead of controlling the board, VC uses protective provisions (veto rights on certain actions). Next-round investors want protective provisions too, but founders should push for all Preferred voting as a single class, instead of each Series voting separately. VCs charge all expenses associated with board meetings to the company. Mandate frugality. Place a cap early on the percentage of directors who can be VCs (not independent). Preemptively offer observer rights to dethroned director, or establish an executive committee of the board that can meet without everyone else.

Drag Along: A compromise is to grant drag-along rights to the majority of the common stock, not the preferred. Preferred can convert some to common to force a majority at the cost of lowering the overall liquidation preference. IPO: preferred convert to common. Never give different automatic conversion terms for different series of preferred. Push for low threshold to conversion.

Redemption: Ensure dividends require board majority approval. Allow investors to sell shares back to the company for a guaranteed return. Never agree to “Adverse Change Redemption” because it is vague, punitive, and investors can act on arbitrary judgments.

No-shop: Do not agree to pay for legal fees until deal done. Avoid pre-financing contingence: 1. “Approval by Investors’ partnerships” means the term sheet has not been approved. 2. “Employment Agreements acceptable to investors”: review & negotiate full terms (e.g. what happens on termination?) before signing term sheet. Limit the no-shop period to 30 days (worst case 60 days), automatically canceled if VC terminates. Commitment should be bidirectional. You agree not to shop deals, VC agrees to close timely. Ask for exception for acquisitions. Frequently financings and acquisitions follow each other.

Registration Rights: Always offered to investors. Lawyers often make innocuous edits on this section. Unnecessary. Upon IPO when the rights apply, investment bankers will restructure the deal.

Right of First Refusal: Define “major investor”, only give such right to them and only if they play in subsequent rounds. Enforce stock sale also transfers obligations the original owner signed up for.

Co-sale Agreement: This right says if a founder sells shares, investors can sell too. Hard to remove this right, but founders should ask for a floor. Why should VC hold it up if a founder just sells a small amount to pay off mortgage?

SAFE: Some VCs consider valuation cap as a price ceiling to the next round, so do not disclose seed-round terms until you have negociated new price. Legal fee for priced equity round has dropped, no more than SAFE.

Zombie VC: VC who past their investment period (usually 5 years) and did not raise a new fund. They can’t invest but still meet you. Waste time. Ask “when was your last investment” (more than a year = zombie). “How many more investments will you make out of the current fund?”

Reserve: Fund approaching end of life creates pressure for liquidity. Underreserved VC may resist new financings, limit round size, or push for sale of company to limit dilution, even when more funding is right for commons. Pay-to-play creates more resistance in this case. Follow-on might come from new fund, or a different fund vehicle (“Opportunity” funds)

Corporate VC: They look for more control, such as right of first refusal on acquisition, which you should never give.

Negociation: Goals: achieving a good and fair result, not killing your personal relationship. Preparation is key. Focus on valuation, option pool, liquidation preferences, board, and voting controls. Know what concetions you are ok with and when to walk away. Get to know the other side ahead of time, play to their strengths, weaknesses, biases, curiosities, and insecurities. First-time founder has one advantage over seasoned VC: time. They got family, LPs, portcos to deal with. You got one company and this negocitation. Ask what the 3 most important terms are for VC. Explain yours too. Call them out if they pound hard on minor points. Don’t make threat you can’t deliver. Don’t say who else you are pitching to. Never provide term sheet from other VC. Don’t address deal points in order but focus on whole picture. “That’s the way it is because it’s market.” probe on why the market condition applies to you. Talk to other founders to get market intelligence. Push back with “Wait a minute, this term creates incentive misalignment. Let’s avoid a divisive relationship.” If stuck with terms you don’t love, next-round investors may fix them because they want your team happy and motivated. After big wins and some time together, renegociate with existing investors for founder-friend terms.

Price: High valuation is risky because 1) VCs hold out for a higher exit (by big perf stack, or forbid sales below $X), then founders can’t sell at a price they would have been happy with. 2) At higher price, sophisticated investors demand more structure, resulting in significant outcome misalignment between early and late stage investors.

Investment Banks: Avoid them at early stage. Hire them in acquisition. They maximize exit value. Best source of bankers: your board members, investors, colleagues, and other senior executives you trust. Hire a banker who knows your sector, like “enterprise SaaS”.

Daily Operation: Hire an employment lawyer when a founder or exec leaves. Make sure equity & IP are settled to protect future fundraising and acquisition. If a company used a professional valuation firm, the valuation would be assumed to be correct unless the IRS could prove otherwise. File 83(b) election to start earlier the clock for long-term capital gains. Pay at least minimum-wage cash comp to full-time founders & execs.

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