VCs and entrepreneurs can start negotiating the terms of the deal fairly early in the investment process. Bharati Jacob of Seedfund likes to agree on terms before diving into too much due diligence: "Let's just make sure we're in the same ball park, so we don't waste our time and energy."
Term sheets act as "a statement of intent from a VC saying that I like your business" explained Balaji Srinivas of Aureos Capital and lay out the terms under which the VC will invest. Avnish Bajaj, Matrix Partners, explains that they outline the, "rules of engagement." Terms would include pricing, controls, rights and preferences. Even after agreeing, these terms might be renegotiated based on the findings from further due diligence on the part of the VC.
The basic terms for early stage companies are similar across term sheets. This, no doubt, reflects the fact that VCs are wrestling with similar risks, and targeting similar returns.
However, term sheet styles can be as different as the VCs themselves. Some VCs, like Balaji, like to work in broad terms, leaving the fine tuning for after the detailed due diligence.
Others, including Avnish Bajaj prefer to get all everything nailed down at the outset. He believes that "if the term sheet is done in a very skeletal fashion, the probability of the deal falling apart later is higher."
Even though many of the terms are similar across the industry, there will be some that don't apply to certain companies or situations. And of course, there is a lot of room to negotiate the aggressiveness of each of the terms - not only share price.
Within veto and approval rights, for example: What's ok, and what's a stranglehold? Does the VC want to approve only the CEO hire, or the entire management team? Does the VC approve the annual business plan as part of the Board, or does he or she want additional, separate approval rights under certain circumstances? What's appropriate for this particular investment? Sometimes, what makes sense to a VC may place real operational constraints on the entrepreneur.
The link between valuation of the company and aggressiveness on certain terms is very clear. The higher the price a VC pays for the shares, the more aggressive he will likely be on the other terms, in part to insure the greater risk he has taken by paying a higher price.