Raising venture capital 101 - Term sheetsIf you have received a term sheet from an investor, congratulations! There are so many clauses in the term sheet that you might not even know where to begin. Let me help you by focusing on what really matters: the Economic terms and the Control terms. The earlier a company is, the less complex a term sheet should be. In fact, most Silicon Valley and Southeast Asian VCs (including Hustle Fund) are familiar with and comfortable with using the YCombinator’s SAFE template. You can learn more about the pros and cons here, but essentially, SAFE is a form of convertible equity. Using this template helps startups save on legal costs at the beginning, delay the issue of pricing the round and dividing up the cap table until the next priced equity round, and reward early investors with a discount for taking the highest level of risks. Most early-stage investments (pre-series A) focus on the Economic terms, primarily 1) the amount of investment, 2) post-money valuation, and 3) discounts to later rounds. This is the area that founders should focus their time and energy negotiating. At this stage, control terms don’t play a significant role as investors often do not invest enough to ask for a Board seat.  As startups grow and raise larger rounds of funding, the term sheet can get more complicated as more money is at stake. Investors will start to focus more on Control terms, such as Board seats, voting rights, veto rights, etc. At later stages, it’s recommended that founders utilize startup lawyers to help review and negotiate the term sheet in detail. There are certain clauses on the term sheet that often don’t mean much and are only there as a hypothetical protection clause for investors. For example, Hustle Fund’s term sheet template has a clause related to dividends. This clause is not very important as most startups are not profitable, so they cannot declare dividends. In addition, dividend declaration when companies are profitable can only happen if and when the Board of Directors approve it. The clause is there simply to protect early-stage investors in the hypothetical case when the Board of Directors (made up of founders and later stage investors) declared a dividend to a certain class of shareholders, excluding the early-stage investors.  Startups are better off focusing their time and energy to negotiate on Economic and Control terms as they are likely to have more impact on their current and future state of the business. Other terms are often just standardized protection clauses for investors. In fact, if founders are concerned about clauses that don’t matter as much, that might raise a red flag in an investor’s mind.  I hope this article sheds some light into how venture capitalists think and evaluate investments into startups. Understanding the fundraising process is important, but I hope that founders do not forget that the ultimate goal of founding a company is not raising a lot of money. The ultimate goal should always be to build a product that customers love and use, while establishing a profitable business model that can help grow and scale the company for years to come.   For more resources, visit Hustle Fund’s Vietnam page here.