As I started angel investing into startups, I began realizing that the amount I was investing gave me virtually no leverage to affect terms. The largest investor typically has the most power to affect terms, since the entrepreneur wants their money the most. They are more likely to negotiate and do what that investor wants than other small fry…like me.
One goal I have is to take the cash I set aside now and try to build it over the next few years to a point where I could be lead investor and really affect terms. This usually starts happening at around a $250,000 or more investment.
But I did find one place where I could actually affect terms without requiring large sums of money. First, I asked my lawyer to draft an example Series A term sheet. I also asked him to make the terms balanced towards investor and the company. This was an important point; many times now, I have seen investments go much quicker when the terms were more balanced. This is even true with my advisor agreement, which is neither overly advantageous towards me or the company. It reduces negotiation, and thus legal fees and time – both of which are desirable.
Second, I start advising these companies very early, even pre-incorporation. I help them in the process of defining their fund raising strategy, and give them my sample Series A term sheet. They love that. Otherwise, they would have to get it from their lawyer and that would cost extra cash. Instead, they present that to their lawyer who reviews it and is usually agreeable on basing their actual term sheet off mine. it would cost them extra cash to alter it later to the requests of potential investors, as well as costing money to go over it with their legal help to understand it all.
This is good because now I have a fair, balanced term sheet which I am investing in, rather than something created by the legal support. Given that most entrepreneurs are new to the fund aspect, and the fact that lawyers will most likely default to a company friendly term sheet to protect their client, being aggressive at presenting a sample term sheet which is balanced provides an opportunity to create a situation where I can actually affect terms and not be the lead investor.