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Investment Lab: Term Sheet Negotiations are No Joke

Investment Lab: Term Sheet Negotiations are No Joke

By Silicon Allee Staff

It sounds like the start to a bad joke – a lawyer, an entrepreneur and an experienced venture capitalist walk onto a stage. In this case, however, it was no laughing matter – the three were taking part in simulated battle over a term sheet. While the term sheet itself wasn’t real, the negotiations very much were.

The event took place at Startupbootcamp Berlin‘s third Investment Lab, and the three featured ‘players were Martin von Haller Groenbaek of Bird & Bird, Christian Nagel of Earlybird VC and entrepreneur Jonas Piela, founder of Avuba. After a brief introduction the trio got down to business.

For many, raising money is like being on an episode of US reality TV show Shark Tank, where Mark Cuban – businessman and early Internet billionaire – and others grill red-faced, nervous, sweaty entrepreneurs in front of a live audience, complete with close ups, dramatic music and mood lighting.

In reality, it’s nowhere near as glamorous – or, fortunately, as nerve-wrecking.

You don’t need a lawyer with you to put together a term sheet. Usually, a term sheet is something between the entrepreneur and the VC. It’s a way of saying: “Here’s what we talked about, so let’s write it down, sign it and send it to the lawyers to make an agreement.”

Though a term sheet is little more than a firm hand shake and a good three second eye lock, in and of itself it doesn’t bind the entrepreneur or the investor to work together. Often times, entrepreneurs, if their “deal is hot,” could get multiple term sheets.

But when a term sheet is signed, there is usually some exclusivity built in, so it shows the VC that the entrepreneur is committed to them.

When done thoroughly, it can make putting together an actual stock purchase agreement more swift.

Monday’s event at the Rainmaking Loft was a great way for entrepreneurs – and would-be entrepreneurs – to get a taste of what it’s like to thrash out an agreement, and the pitfalls to look out for.

But if you’re an entrepreneur, you first of all have to ensure you have something in which a VC wants to invest in the first place – so stop reading this and get back to work!

About David Knight

David is co-founder and Editor-in-Chief of Silicon Allee. Originally from London, he has lived in Berlin for over seven years, having previously worked for news portals including Bild.de and Spiegel Online before helping to found Silicon Allee in 2011.

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