So You Signed a Term Sheet? You’re Not Out of the Woods Yet

Posted on March 27, 2010. Filed under: startups, Uncategorized, venture capital | Tags: angel investment, Founders, startups, term sheets, venture capital |

The first time I raised capital, I remember negotiating my term sheet with Rob Stavis at Bessemer Venture Partners (who, btw is as straight shooter and transparent a VC as I know). The deal they gave me was completely clean and standard, but as a first time entrepreneur I scrutinized over every word of that term sheet, to make sure I understood exactly what I was signing and agreeing to. Once I got comfortable with every sentence in the term sheet, I signed it, and waited anxiously to receive their signature back. When it came, I breathed a massive sigh of relief, turned it over to our lawyers, and thought that I had successfully completed the negotiations around our raise.

What I didn’t realize, and what I think most first time founders don’t know, is that a term sheet is simply a guide that lawyers work off of when creating the final documentation around a financing. When you blow a 2 page term sheet up into 50 pages of documentation, it turns out there are a ton of specifics which are not addressed when a founder and investor first agree on a deal. These specifics, when addressed in the docs, can fall in the interests of an investor or a founder, and thus the negotiation you thought you were done with opens up for a “round 2.” This “round 2” can be awkward, because emotionally, you have already agreed to a deal and “partnered” with your investors. Everyone is happy and excited, and then you are once again put back on opposite sides of the table.

What I learned from Rob, was that negotiating a financing isn’t about winning and perfectly optimizing for your interests. It is an exercise in reasonability. Sharp elbows and hard lines on small (albeit important) points are a waste of time and good will between you and your future partner. Once you agree to partner, your collective goal should be to complete the deal in a way that is even, not self interested. My advice: don’t sign a term sheet with someone who you don’t think is capable of going through this exercise in reasonability with you.

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