American founders have a similar knowledge gap when it comes to typical Asian deal terms.
U.S. founders aren't accustomed to putting their own assets on the line to secure financing, though this is common in Asia for early-stage founders. Similarly, American entrepreneurs are often shocked to see Asian VC term sheets that require founders to pay the investors a significant sum for deal-related expenses - a provision that is binding even if the deal is never completed.
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Without an understanding of why Asian investors include this provision, this demand seems ludicrously overreaching. Its purpose is to ensure that all parties approach negotiations with focus and gravity. With a significant amount of money on the line, the reasoning goes, the parties are more motivated to reach accord. This stipulation is familiar in Asia, but I routinely delete it from term sheets during contract negotiations because it seems counterintuitive to reaching an arm's-length agreement.
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Shunning Asian capital may ultimately cost you down the line.
Remember that the Asian VC market, while explosive, is still in its infancy: Chinese-led venture funding has increased 15-fold since 2013, according to The Wall Street Journal. Because this market is so immature, investors aim to add language to term sheets that will give them an advantage.
It's also typical to see term sheets that include full-ratchet anti-dilution protection and most-favored-nation clauses. But their ubiquity doesn't mean founders must be stuck with them. I encourage would-be investors to embrace realistic expectations by reviewing deal point studies, which summarize the typical terms in recent deals. Most major law firms, including mine, produce their own.
Keeping your cool
If a financing term sheet contains troublesome or even outrageous terms, don't take it personally. Task your lawyer with explaining to foreign prospective investors why the term sheet they provided is wildly different from typical U.S. deal terms. Leave the expression of deep disappointment to your counsel so your feelings won't taint your relationship with the investors.
I recently provided this type of feedback to a group of would-be strategic investors from China. When they produced pages of unreasonable terms, I directed them to the model financing documents on the sites of the National Venture Capital Association (NCVA) and Series Seed. The forms from these neutral sources include typical terms and agreements drawn up by a group of investors, entrepreneurs, counsel and advisers. They need to be tweaked for each financing scenario, but they cover all the basics and beyond. In this instance, the Chinese investors reviewed this information and did some additional research. They then returned with far more conciliatory terms, which the founder ultimately accepted.
If you're concerned that the need for negotiations and diplomacy with foreign investors will be time-consuming and distract you from your business goals, reconsider. Shunning Asian capital may ultimately cost you down the line.
Many Chinese VCs are well-connected, and a respectful, productive relationship with these investors can help you open doors to wealthy investor conglomerates eager to fund promising startups. Those connections can, in turn, lead you to larger, global markets that you could never have accessed otherwise.