I've been talking with a great entrepreneur recently, connecting her with some awesome folks and weighing in on funding. A kind of crappy seed-stage term sheet is on the table from a group that should be more, well, they ought to know better.
I think you should set the the terms. The bottom line is the exit--what does an exit look like to them at different levels, given X %, and what does an investment with lousy terms do to the morale to a founding team given additional rounds of funding.
Most terms are about risk mitigation, including percentage, which is a bit of a distortion in the first place because of all the other terms, which skew investor percentages upward.
Make the deal 20%. $500k for 20% post, so your pre is 2.0 million, 1x non-participating liquidation preference. That's not about current value, it's about buying into a growth path.
If you sell for 500k, they get their money back.
A million, they get their money back. That's 50% of the outcome.
$5 million, they get double their money. Think you can sell a great, proven idea on the upswing for $5 million? No question. In this environment, with the connections you have, that could happen this month.
$10 million? Very possible. So they've made 4x on $10 million. The outcome is what matters, and any outcome that returns capital and gives more than a 10% annual return for them is a huge win given the stagnant equity markets over the past 11 years. It's not great to just get a 10% return, but it's not a bad outcome for investors. And you have the chance to give them 400%?
Try 1000%--that's $20 million.
$20 million? Depends. You need serious traction once you head over $10 million. A strategic play is certainly possible, but with a vibrant growing community over 20,000 people (I don't know the specific number, but depending on the profiles and the reach of the acquirer), it becomes more possible.
I'm only talking about this because it effects your deal terms. I think you should aggregate a couple of articles about deal terms and the purpose and ethic of seed stage capital and send that along with the plan. Fred Wilson has one, Chris Dixon might, etc. Those posts support the argument for simple, healthy terms for the founders at the seed and early stages.
When you feel great about the deal, the energy will be so positive, so huge, that they'll have gotten an amazing deal. You'll be on fire.
They can't buy that kind of fire. But they can nickel and dime it to death.