In venture capital, sometimes you have the luxury of being a term sheet maker. In other words, you get to have a strong say on the terms at which you’re investing in a company.
The conditions under which this is more likely to occur are when there is limited competition for the deal, you have a unique ability to add value to the company which is recognized by the founder, you’re investing a relatively large check size, and, better yet, a combination of multiple of these conditions.
But often, these conditions aren’t present. There are multiple bidders at the table, each of these bidders is in a position to add value to the company or at least this is what’s perceived by the founder, and your investment amount is relatively small.
When this is the case, you often have to take the term sheet that is put forth by the company. In other words, the company dictates most of the terms.
While this is suboptimal from an investor perspective, not doing these deals would mean missing out on some great companies. In fact, some of the conditions which produce an environment where you need to accept being a term sheet taker are the direct result of the quality of the company. For example, higher quality companies attract more bidders to the table and this gives the companies a stronger say on the investment terms.
When this is the case, if you really want to be part of the company, you have to take the term sheet on the table.