How to negotiating a term sheet in challenging times

9 May 2024

In scenarios where sales traction is not as expected and the runway may be shorter than anticipated, it can be challenging to find a suitable investor to bridge that gap without giving away a significant stake of the company. In such situations, it can be crucial to know the ins and outs of a term sheet to negotiate a good deal. The difference for future funding rounds, and the founders’ stake is often made by having a wise strategy in the negotiations.

Raising in a difficult economic environment can create additional pressure, as investors are well aware of the challenges. It is therefore important to be as transparent as possible, with a clearly outlined strategy and a compelling narrative. Never go in negotiations unprepared and always think in solutions rather than problems.


In a use case for one of our clients, we successfully helped them orchestrate an internal funding round from their current investors. As the current investors were well aware of the periodic updates, sales traction wasn’t going according to plan.

By setting meetings with all of the shareholders individually before pitching the funding round, feedback and buy-in were collected so this could be integrated into the proposed action plan and strategy for upcoming periods. In those meetings, presenting them with the challenges along with pitching some of the proposed actions, there was room to discuss and align interests by understanding the perspective of the investors.

After collecting these valuable insights, a strategic memo was created to reflect all initiatives as well as a clear and concise action plan. With this document as a basis, and the translation into a solid financial plan including various scenarios, a proposed investment was agreed upon. With the invested capital serving as new fuel for the company’s growth, the team is on track to prepare their next solid funding round while continuing to build the foundation of a profitable business.

Methodology for negotiating a good term sheet

Let’s dive into the methodology of how to negotiate favorable terms while setting the scene for future growth. Remember that this is a process that could take some time. Better act on it too soon rather than too late when urgency takes the reins of favorable terms. 10 steps that will help you!

1. Setting the stage: In the initial stages of negotiation, it’s crucial to be transparent about the challenges your startup is facing. Clearly articulate the reasons behind the unexpected sales performance and demonstrate a solid understanding of the steps being taken to address and overcome these challenges. Transparency lays the foundation for a collaborative and problem-solving approach.

2. A compelling narative: Turn challenges into opportunities by crafting a compelling narrative. Emphasize the lessons learned, the adjustments made, and the strategic pivots that position the company for future success. A well-articulated narrative not only instills confidence in potential investors but also frames the negotiation in a positive light.

3. Understanding Investor Motivations: In challenging times, investors may be more risk-averse. Understand their motivations and concerns, and tailor your pitch to address these specific points. Highlight the potential for significant returns once the sales trajectory is corrected and emphasize how their investment can play a pivotal role in the company’s turnaround.

4. Valuation Realism: While founders naturally want to retain as much equity as possible, a realistic valuation is crucial for securing the investment needed to navigate troubled waters. Consider a pragmatic approach, acknowledging the current challenges while presenting a realistic growth projection. A fair valuation increases the likelihood of finding a willing investor.

5. Convertible Notes and SAFE Agreements: In situations where traditional equity deals might be challenging, explore alternative funding structures like convertible notes or Simple Agreement for Future Equity (SAFE) agreements. These instruments allow for flexibility in valuation and can be structured to convert into equity at a later, more favorable date, protecting both the investor and the founder.

6. Bridge Financing with Clear Terms: If the primary goal is to bridge the funding gap, structure the term sheet to clearly outline the terms of the bridge financing. Address the specific milestones or conditions that trigger subsequent rounds or conversions, providing a roadmap for both parties to navigate the post-investment landscape.

7. Protecting Founder Equity: While securing immediate funding is crucial, founders must be diligent in protecting their equity stake. Incorporate protective provisions, such as reasonable dilution limits and anti-dilution mechanisms, to ensure that future funding rounds do not disproportionately erode founder ownership. This can be a crucial factor for attracting new investors in any future funding rounds. Control is key.

8. Negotiating Control and Board Representation: Striking a balance between maintaining control and attracting investment is pivotal. Negotiate board representation in a way that ensures strategic guidance without compromising the founders’ ability to steer the ship. Consider staggered board terms or observer rights as alternatives to full board seats.

9. Communication and Relationship Building: Effective communication is key, especially in challenging times. Regularly update investors on the progress made, openly addressing both successes and setbacks. Building a strong relationship based on trust and transparency can foster a collaborative environment that is conducive to future negotiations.

10. Preparing for a future Round: Use the current term sheet negotiation as an opportunity to set the stage for future funding rounds. Ensure that the terms are structured in a way that attracts future investors, demonstrating a commitment to scalability and growth.

A difficult balance!

Negotiating a term sheet in challenging times requires a delicate balance of realism, strategic thinking, and effective communication. By understanding investor motivations, crafting a compelling narrative, and protecting founder equity, startups can navigate difficult waters and emerge with a deal that not only addresses immediate funding needs but also sets the stage for future success. Remember, a well-negotiated term sheet is not just a financial arrangement; it’s a strategic partnership that can shape the trajectory of your startup.

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