Negotiating a term sheet

Hello from Northline. Thanks for setting this up. To get us started, here is our opening proposal for a non-binding Series A term sheet:

1. Investment: $8.0M Series A Preferred, at a $28M pre-money valuation (fully diluted). Funded in two tranches: $5M at initial close, $3M on agreed revenue/customer milestones.
2. Option pool: 10% of post-money fully diluted, created in the pre-money (no post-money top-up).
3. Liquidation preference: 1x non-participating, non-cumulative.
4. Anti-dilution: broad-based weighted average.
5. Board: 5 seats — 2 common, 2 Northline, 1 independent mutually agreed. Plus one Northline observer.
6. Protective provisions / board approval: annual budget; hiring or firing C-suite; debt above $1.5M; material unbudgeted entry into a new line of business.
7. Founder vesting: founder shares re-vest over 4 years with 1-year cliff, credit for time served to be discussed; 50% double-trigger acceleration.
8. Information rights: monthly management accounts, quarterly board pack incl. customer-concentration reporting (top-10 customer share of revenue), annual budget 30 days before FY start.
9. Pro rata: standard pro rata rights for Northline in future rounds.
10. No-shop: 45 days. Northline legal expenses capped at $50K, paid by the company at close.
11. Founder secondary: none.

Happy to hear Kestrel’s priorities. I’ll keep a running draft in the shared Google Doc.

Hi Northline — Kestrel here, representing Kestrel Signal’s founders. Thanks for working on this together. To get us moving, here is our proposed framework for a non-binding Series A term sheet (we’ll mirror agreed points into the shared Google Doc):

1. Investment: $8.0M from Northline, single initial close, no tranches.
2. Valuation: $36M pre-money, with a 10% option-pool top-up included in the pre-money.
3. Security: Series A Preferred, 1x non-participating liquidation preference; non-cumulative dividends only if and when declared; standard optional/automatic conversion. No warrants.
4. Anti-dilution: broad-based weighted average.
5. Board: 3 seats — 2 common directors and 1 Northline director. Northline may also have one non-voting observer, subject to customary confidentiality and privilege carve-outs.
6. Protective provisions: standard Series A class protections, plus a closed investor-director approval list: annual budget; hiring/firing of C-suite; debt above $1.5M; entry into a new line of business requiring more than $2M of unbudgeted spend.
7. Investor rights: standard pro rata participation; monthly KPIs, quarterly financials, annual budget.
8. Founder vesting: existing vesting schedules continue; vested shares remain vested.
9. Founder liquidity: $250K of founder secondary inside the $8M.
10. No-shop: 30 days. Company pays Northline’s reasonable legal expenses up to $35K.

Keen to hear your priorities — where do you see gaps?

Thanks Kestrel — our proposals crossed. There’s good overlap: $8M, 1x non-participating non-cumulative, no warrants, broad-based WA anti-dilution, pro rata, the closed approval list, pool in the pre-money. Here’s a counter that moves meaningfully toward you on structure:

Where we move:

• Board: we accept your 3-seat board (2 common, 1 Northline) plus a Northline observer with customary confidentiality/privilege carve-outs.
• Funding: we’ll drop the tranche and fund the full $8M at a single initial close, provided the monitoring package below is in.
• Vesting: we drop full re-vesting. Vested shares stay vested; the remaining unvested tail extends by six months; 50% double-trigger acceleration.
• No-shop: 30 days is fine.

Where we need to hold:

• Valuation: $36M pre doesn’t work for us. Our channel checks were positive on customer enthusiasm but also surfaced a new competitor in procurement, which we have to price in. We can move to $30M pre ($38M post), 10% pool in the pre-money.
• Secondary: at that price we’d rather all $8M go to the balance sheet. Open to discussing a small amount only if the overall economics land in the right place.
• Monitoring: monthly KPIs and quarterly financials work, plus customer-concentration reporting each quarter (top-10 customers’ share of revenue and any customer above 10%). That’s what lets us fund without a tranche.
• New line of business: a $2M unbudgeted threshold is a quarter of the round. We’d propose $750K.
• Expenses: cap at $50K.

Can you live with this shape? Valuation is the main gap.

Thanks Northline — that’s real movement and much appreciated. Confirming we’re aligned on: $8M single initial close, no tranche; 3-seat board (2 common, 1 Northline) + one observer with confidentiality/privilege carve-outs; vested shares stay vested, six-month extension of the remaining unvested tail, 50% double-trigger acceleration; 30-day no-shop; 1x non-participating, non-cumulative; broad-based WA; standard pro rata; 10% pool in the pre-money; no warrants.

Our counter on the open points:

• Valuation: $30M is too far from where we can go. We’ll move to $34.5M pre-money (10% pool top-up in the pre).
• Secondary: to make the economics work for you, we’ll drop founder secondary entirely — all $8M to the balance sheet.
• Expenses: we accept a $50K cap.
• Monitoring: monthly KPIs, quarterly financials and annual budget approval, plus prompt notice to Northline of any material development with our largest customer (e.g., non-renewal, termination or a material reduction). That addresses concentration risk directly and in real time, rather than through a recurring top-10 schedule.
• New line of business: we need to keep the $2M unbudgeted threshold. The point of the list is to cover genuinely strategic bets; ordinary product extension work shouldn’t require investor sign-off, and the budget approval right already gives Northline a say over planned spend.

If you can meet us on valuation, we can close the rest out quickly.

Thanks Kestrel — dropping secondary and accepting the $50K cap are appreciated, and I confirm the aligned list you set out.

On the three open points:

• Valuation: $34.5M is outside what we can do. We’ll move to $32M pre-money ($40M post), 10% pool in the pre-money, all $8M primary.
• Monitoring: we like the prompt-notice covenant and will take it. But event notice alone tells us when a problem has already happened; given we’re funding everything up front, we need the trend too. Proposal: your notice covenant (non-renewal, termination or material reduction by any customer above 10% of revenue, not just the largest), plus a single line in the quarterly financials showing revenue share of the largest customer and top 5. That’s data you’ll already have — not a new schedule.
• New line of business: we hear you on not gating ordinary product work. Let’s say entry into a new line of business involving more than $1M of unbudgeted spend in any 12 months, with an explicit carve-out for extensions of the existing product. That keeps it to genuinely strategic bets.

If we can settle those, I think we’re there.

Thanks — we’re close. On the three points:

• Valuation: we’ll come down to $33.5M pre-money ($41.5M post), 10% pool in the pre, all $8M primary. That’s a $3M move from our opening and it’s the bottom of our range; we can’t go below it.
• New line of business: we’ll take your carve-out for extensions of the existing product and the 12-month measurement window, but the threshold needs to stay at more than $2M of unbudgeted spend. With the carve-out, that captures genuinely strategic bets, and your budget-approval right already covers planned spend.
• Monitoring: we’ll keep the prompt-notice covenant on the largest customer (non-renewal, termination or material reduction), plus monthly KPIs, quarterly financials and annual budget approval. We’d rather not extend the covenant set to every >10% customer or add a standing concentration schedule; your board director will see the full customer picture in board materials in any case.

If that works, I’ll write the agreed terms into the shared doc.

Kestrel — I’ve put a working draft in the Google Doc reflecting everything we’ve aligned on, with the three open points (valuation, concentration reporting, new-line threshold) in brackets showing both positions. Let me know your view on our last counter when you’re ready.

Thanks for putting the draft together — it reads well. Our response to your last counter is the message just above (posted 21:25): $33.5M pre-money ($41.5M post), all $8M primary; new-line threshold at more than $2M of unbudgeted spend in any 12 months with your carve-out for extensions of the existing product; and the prompt-notice covenant on the largest customer, without the >10%-customer extension or a standing concentration line. I’ll update the brackets in the doc to reflect our current position.