A term sheet is a document that sets out the basic terms and conditions under which the VC will invest in your company.  Work completed in the due diligence phase of the funding process is used to draft this document.  The term sheet is generally non-binding and is used as a template, along with further due diligence, to draw up more detailed legal documents.

You will, no doubt, be particularly concerned with the valuation of your company set forth in the term sheet.  To arrive at this figure, the VC takes into account your management team, your company’s market and competitive advantage in the marketplace, and your earning potential.  The various factors that go into a valuation are determined during the due diligence phase.  Note the difference between pre-money valuation – the valuation of your company before a VC invests in it, and post-money valuation – the pre-money valuation plus the contemplated investment amount.

A good tip for negotiating the best valuation is to have multiple VCs interested in investing in your company.

In negotiating your term sheet, keep in mind that there are two central issues for the VC.   The first is the economics of the deal, i.e. the return on investment and the terms that dictate that return.  The second is control, meaning how the VC will be able to exercise control over your company’s decisions.  The pertinent negotiations will revolve around these two issues.