Guides · Capital raising mindset

How to Negotiate a Term Sheet

A term sheet is an offer. It is not a final answer. Many investors and sponsors read one, feel relieved that someone wants to do business, and sign close to what was sent. I see that mistake often at Family Office Club.

Over the years I have watched families, GPs and founders work through term sheets of $3 million, $10 million, $12 million and $15 million. The steps below come from what I have seen and said on camera. Many people ask a securities attorney to review documents before they sign anything.

The steps

Step 1. Know your goals first

Before you read a single clause, know what you want. I tell family offices to fill out the family office dashboard first. It covers your family values, your objectives, your mission and your direct investment buy box. Without that clarity, you will react to whatever terms the other side puts in front of you. A lack of clarity and a lack of intentionality sit behind many of the costly mistakes I see. At Family Office Club we help with this for free. Write down what a good deal looks like for you, then compare every term sheet to that list.

Step 2. Start with the right mindset

Negotiation is part of the game. In my experience, many companies expect you to negotiate, so do not be shy about it. The people raising money need capital, but they also gain from a strategic partner who brings ideas. Many investors do not realize how much room they have. This is especially true when the other side is less sophisticated. Look for changes that help both sides, not just you. A good ask is one the other party can say yes to, because a deal that works for both sides is more likely to close.

Step 3. Ask for a custom structure

Too many investors go into deals like everybody else. Many investors explore custom fee structures, joint venture deals, co-GP deals and different share classes with their attorney. In my view, not customizing the fees and structure can be a costly mistake. In my view it can cost more than buying an expensive home at the top of a market. In my experience, even smaller families can lose hundreds of thousands of dollars this way and larger families can lose millions. Many people talk to a securities attorney about how to structure this.

Step 4. Ask for rights, not only price

If you are their number one investor or one of the top five, ask for a reduction in fees. Many investors raise topics like co-investment, tagalong, dragalong and non-dilution rights with their attorney. These are the items many investors skip, and I count skipping them as a real million-dollar mistake. Put each one on your list before the first call. Rank them, so you know which ones you will trade and which ones you will hold. Many people also ask counsel how each item reads in the final documents.

Step 5. Make terms work for both sides

In a co-GP deal, a partner used to taking the full pie has to be willing to give part of it up. One $3 million term sheet was at risk because the GP wanted guarantees on how much LP capital the co-GP would bring. The GP did not want a flexible arrangement that ratchets up with more LP capital. Another $10 million term sheet depended on terms being exciting for both sides. When a point stalls, ask what the other side needs and offer another way to get there. Many sponsors talk to a securities attorney about how a co-GP role fits with raising capital.

Step 6. Give the process time

One of our clients took four and a half to five months to negotiate terms on a $12 million term sheet. They met the firm at one of our virtual investor events earlier that year. After the negotiation they signed a letter of intent and hoped to move forward. Do not treat a slow back and forth as a failure. Keep a running list of open points, answer each one in writing and keep the tone friendly. Persistence matters in negotiating deals, and I cover that idea in a separate video.

Step 7. Know when to say no

A car wash founder told me a private equity firm gave his team a term sheet after two weeks. It was for 15 million dollars to build six washes. They had never done real estate or operated anything. They took a step back and decided that proving the model first would make the economics much better for them. They turned the money down and raised friends and family money instead. Compare it to your plan and be ready to walk.

From my talks

From my books and event talks

The biggest mistake I see when someone approaches a family or raises capital is walking in with a standard two and 20 term sheet and asking, do you want to invest, are you in or out? That treats the paper as a take it or leave it demand. I would rather start with a conversation about what the family wants, then shape the fees and structure around it. A term sheet works best when it comes out of that discussion, not before it.

Mistakes to avoid

• Signing the first term sheet without asking for any change.
• Going into a deal like everybody else with no custom fee or legal structure.
• Skipping requests for fee reductions and co-investment, tagalong, dragalong or non-dilution rights.
• Pushing terms that only work for you, so the other side has no reason to agree.
• Assuming a co-GP role needs no conversation with a securities attorney about raising capital.

Key facts

• A private equity firm gave a car wash team a term sheet for $15 million to build six washes after talking for 2 weeks, and the team turned it down.
• A client negotiated a $12 million term sheet for four and a half to five months before signing a letter of intent.
• One $3 million co-GP term sheet was at risk because the GP wanted guarantees on how much LP capital the co-GP could bring.

General education only. Not legal, tax or investment advice.

Talk to a securities attorney to explore options around custom fee structures, co-GP capital raising and investor rights provisions. Do not use AI to write your own legal agreements.

Questions about this guide

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