Le Gouvernement du Grand-Duché du Luxembourg

Navigating Term Sheet Negotiations With Investors

At the Luxembourg Venture Days held on October 16-17, 2024, a panel discussion surrounding navigating negotiations between investors and startups, took place. This session offered attendees an in-depth look into the complexities of negotiating a term sheet during a fundraising round, providing valuable insights into the dynamics between founders and investors.

06/05/2025

The panel during the Luxembourg Venture Days was moderated by investor Christophe Bianco, LBAN board member, with Matias Mäenpää, co-founder at Videobot, and Kevin Muller, CEO at Passbolt. “So the idea is to demystify the negotiation when you start to enter into your relationship with an investor. So the goal of that session was more on educational objectives and just to make people aware that they have to spend some time on that and think about that before entering into negotiation” said Bianco.

The session focused on a hypothetical startup, co-founded by Matias and Kevin, which seeks to revolutionize the education sector. The company, at the pre-fundraising stage, aimed to raise a $2m investment, sparking an in-depth discussion on four critical aspects of term sheet negotiations: valuation, board composition, founder departures (good leaver/bad leaver), and liquidation preferences.

Valuation

The negotiation on valuation is crucial, as it directly impacts both the founders' dilution and the investor's equity stake. Christophe initially proposed a $4 million valuation, offering $2 million in exchange for 30% equity. The founders, on the other hand, aimed for a much higher valuation, referencing success stories from Silicon Valley. “From an entrepreneur's and founder's side. Just short and simple. I would really much hope that the founders are not so afraid of the term sheets. It's not about a VC trying to rob your company. It's about following certain rules that are fair for all sides when you go together with the journey,” said Mäenpää.

I would really much hope that the founders are not so afraid of the term sheets. It's not about a VC trying to rob your company. It's about following certain rules that are fair for all sides.

The discussion emphasized the importance of a balanced approach to valuation. Overvaluing a company at an early stage can backfire in future fundraising rounds if the company fails to meet growth expectations. Founders should aim to maintain control and avoid excessive dilution in early rounds, as this can hinder their ability to lead the company effectively.

Board composition

Board composition is another pivotal issue in term sheet negotiations. Investors initially propose taking three seats on a five-person board, giving significant decision-making power. The founders pushed back, advocating for a majority of founder-controlled seats to ensure that those most familiar with the business drive its direction. 

Good leaver/Bad leaver clauses

The conversation briefly touched on founder departure scenarios. These clauses define what happens if a founder leaves the company under favorable (good leaver) or unfavorable (bad leaver) conditions. Investors seek these clauses to protect their investment, ensuring that founders remain committed, while founders must be aware of the potential risks to their equity should they leave the company.

One of the trickiest aspects of founder agreements is defining what happens if one of the founders exits the company. A "good leaver" typically keeps a portion of vested shares, while a "bad leaver" loses more. These clauses protect the company's future by ensuring that only committed founders benefit from long-term equity, while discouraging opportunistic exits.

Liquidation preferences

Lastly, the panel discussed liquidation preferences, which dictate the order and amount of payouts to investors in the event of an exit or liquidation. Investors typically seek protection to ensure they recover their investment before other shareholders (like the founders) receive any payout. 

At the end it has to be a win-win deal between the founders and the investors.

The session underscored the need for a balanced term sheet that protects both founders and investors. Investors want to ensure their capital is safeguarded, while founders need enough equity and control to steer the company toward success. “I think what is important is to understand the investor's perspective. I think a lot of founders are so busy with the day-to-day execution that when they negotiate the term sheets they don't realize that investors have their own agenda and their own interests and that at the end it has to be a win-win deal between the founders and the investors. So I hope that this is the message that we conveyed. that it's very important to understand the point of view of the investors,” said Muller.

Board engagement

Many startup founders see the board as a threat rather than a valuable resource, which can be problematic. VCs invest not just to provide funds but to support the company throughout its journey. Regular board meetings offer a structured opportunity for reflection and strategic decisions, helping founders distance themselves from daily operations and assess performance. A well-documented board process can also expedite due diligence for future investors.

Seeking expert advice

During term sheet negotiations, founders should seek advice from mentors, lawyers, or experienced founders. The goal is to ensure that the company's success comes first, which will, in turn, lead to personal success for the founders. A term sheet protects the company's future more than just the founders' individual interests.

Overall, the importance of a balanced approach to these negotiations cannot be overstated. Founders should aim to protect the company's long-term success while ensuring they retain enough equity and decision-making power to guide it.

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