HQQA021 What are the terms of the deal?

What are the terms of the deal? – Give them some information

The terms of a deal start with whether you are doing a convertible note or a priced round.

A convertible note is a debt instrument that typically converts into equity when you raise again- what is called a qualified financing round. The key terms are the discount, the cap and perhaps the interest rate. Although, the latter is not that key and is typically the statutory minimum (Ask your lawyer).

A priced round is where you agree to a lot more terms and in great detail. The key terms are the pre and post money valuation, the amount you are raising (since pre + investment = post valuation).These, along with various control and economic terms such as; if there is a board seat, information rights, liquidation preference, anti-dilution etc.

The investor is trying to get information out of you as usual. Unless you are in advanced discussions and have received multiple term sheets, it’s probably best not to get into too many specifics, particularly if you don’t understand term sheets very well.

You have been asked this question specifically so you will have to respond with something – “I don’t know” . This is a bad response.

If you respond with something like “market” then you’re in inviting a follow-up question like – “can you be more specific please?”

I would treat this with a high-level response whilst still being slightly vague, and deferring to the investor to offer their terms. It’s very normal to say in your pitch deck:

Seed stage
Priced round
Raising $10m

Angel round
Convertible note structured as SAFE
Raising $1m

I don’t recommend saying more than that. It is not a wise move to think you will be able to set all the terms, so why bother? Instead, get the investor to offer a term sheet and then negotiate what you can. With this information, you shouldn’t find yourself asking “What are the terms of the deal?”

There is an old VC joke, “You can set the valuation if I can pick the terms”

What you need to say

“High level, we are doing a priced, seed round. We need $3m according to our plans. Terms of course matter to us, arguably more than the valuation. We appreciate that you as an investor will want to have certain terms to protect you as a minority shareholder, and we completely understand that.

We are not going to accept things which are not market such as full ratchets. We are expecting pretty standard terms. I would like to know how you are typically structuring your deals?”