Raising venture capital in the current markets is not what it used to be. A little more than a year ago, many entrepreneurs looking for capital had little difficulty obtaining term sheets favorable to their companies. This year venture capitalists are taking much longer with their investment decisions. Yet, companies with solid technologies and strong management teams, particularly those with a track record of entrepreneurial achievement, are getting funded despite the downturn in technology investing. If one reputable venture capitalist has committed to lead a financing round, others are falling into line to complete a syndicate as well.
Also, with the pace of deals slower than a year ago, entrepreneurs and their legal and financial advisors have a much better opportunity to think through the terms and structure of financing deals. When deal activity moved more rapidly, there was a tendency to accept a cookie-cutter approach to financing terms, which may not have been appropriate for every situation. In a market where investors are not enjoying the type of returns they are used to at astronomical valuations, some of these terms will be re-examined. Questions such as how the investors’ payment on a sale of the company is calculated, the necessary approvals for replacing management, and the mechanism by which anti-dilution protection is calculated, all become very relevant for struggling companies in an uncertain market.

Entrepreneurs seeking venture capital in today’s market environment are well served to stay focused on the fundamentals: investment term sheets need to be analyzed based upon the long-term needs of a business. As a result of the uncertain market environment, some have lost sight of the fundaments and in a rush to secure a term sheet have agreed to investment terms that may prove disappointing to founders and the management team in the future. While many terms need to be thought through very carefully before agreeing to a deal, a few have become prominent points of negotiation over the last year and on which one should particularly focus in negotiating a deal:

Valuation
Perhaps the most drastic example of the difference in term sheets from a year ago is in valuations. Pre-money valuations are substantially lower than they were a year ago. Some entrepreneurs, fearing that they are giving away too large a percentage of their company for the money, have focused on valuation while conceding a number of other important deal terms. However, this approach to valuations may be ill advised. It is important to remember that large changes in valuation may be less important than they appear.