You’ve got six months runway left. Finally, a VC offers you a term sheet. But it’s a low ball offer. Should you take it? 

Browsing Reddit this morning, I came across a founder in this very situation.

A Midwest VC offered him a term sheet at a low valuation with heavy dilution. This early round will cost him 30% of the company. 

Here’s how to decide whether to take that low ball offer…

Under 6 Months Runway = Danger Zone

If you’ve got six months’ runway or less, your company is in a critical situation. 

Funding rounds often take several months to close. Even if you accepted a term sheet today, by the time it closes, you could be down to 3 months runway or less. 

That is perilously close to going out of business. 

If you had a year’s runway, you’d probably reject that low ball offer. But with minimal cash, you should probably take it.

This is why I recommend starting your fundraise with 9-12 months of runway (assuming you’re burning cash at all). You don’t want to get into a cash crunch and be pressured into taking any term sheet available. 

Can You Get to Breakeven?

There’s one way to be sure you have the upper hand in fundraising: get to break even.

If this founder can simply get his company to break even, he can use that leverage to get a better offer from the Midwest VC or someone else. He could even decide not to raise money at all. 

Maybe this founder could stop taking a salary temporarily. Perhaps he could let go some underperforming employees. Or maybe there are some tools he’s paying for that he isn’t really using. 

Every dollar he can cut will help in extending runway. And if he can get the burn to zero, the power balance will flip.

Is 30% Dilution Too Much?

30% dilution is very high for a pre-seed or seed round. I typically see 15% to 20%. 

But beggars can’t be choosers. If there are no other good offers on the table and your company is running out of money, you may have to live with that dilution.

If your company is a success, you can make it up later. 

Let’s say your pre-seed round dilutes you 30%. If you start to grow rapidly, you might be able to skip straight to a Series A. 

This would avoid the 15-20% dilution of a seed round. By the time you hit Series A, you’d be in a similar position to a startup that has raised two rounds of 15% dilution. 

Wrap-Up

Negotiations are about power. If you’re running out of money, you don’t have any. 

If it’s between taking a low ball offer and losing your company, taking the low ball offer makes sense. But you want to avoid getting into that position in the first place.

Do everything you can to get to break even before you raise. Then, you dictate the terms.

Have you ever gotten a lowball offer from a VC?

More on tech: 

Your Deck Probably Sucks. Here’s How to Fix It.

How Early Stage Founders Can Save Money and Buy Their Freedom

How to Tell If Investors Are Really Interested

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