So in the same way that a venture capital firm is doing diligence on you, don’t be afraid to do some diligence on them. Check to make sure they’re the right fit, and try to make sure they’re a team that hangs in there through the highs and the lows. It’s easy to be a great partner when things are going well, but what happens when a firm faces obstacles, and how does that venture capital firm behave? One of the common sayings in our business is that, “The best entrepreneurs have choices.” And as you as an entrepreneur embark on your financing process, make sure you run a process that puts yourself in a position to have those choices. Don’t just have one set of conversations with one firm. Try to broaden your aperture. Talk to a number of firms to find out who’s the best fit, and synchronize the process so everyone ends up at the same place at the same time, and you can make the final decision. You want to have the decision be in your hands and not be managed by the process itself.

When you’re considering working with a particular venture capital firm, make sure of a few things. First, make sure your vision is aligned. Make sure you have the same objectives and see the industry playing out in the same way. Second, make sure that they’re really backing you and your team. Have a clear view of what they see as the management team transitions over time if any transitions over time need to be made. And finally, make sure your expectations about exit are aligned. Some firms look for a quick flip after a year or two; others want to hold for the long haul and go after a very big outcome. If you’re thinking you would sell at $10 or $20 million and they’re waiting to sell for a billion dollars, there’s going to be a mismatch.

At some point in the process, if things are going well, you’ll receive a term sheet. For an entrepreneur, receiving a term sheet is that magical moment. It feels like the VC firm is finally committing to investing in you. The term sheet will contain all the provisions, all the terms of the deal that the investment will be comprised of. And there are really two things you want to focus on—control and economics. Control addresses the issues of who gets to make what decisions, whether of selling the company, taking on new investment capital, composition of the board, and even who gets to fire the CEO. Economics involves the dilution that you face from the investment, and how the pie will be split in the event of an exit. There’s the pre-money valuation—that’s how valuable the company is before the money comes in. And there’s the option pool—how big a pool of shares are set aside for future hires. I’ve had situations where the option pool is as big as 20% which is far more dilutive than if the option pool is as small as 5%. Term sheets can be very complicated documents or very simple documents. But in any event, get an experienced deal lawyer to help you navigate them.