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: , , , , |

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.

P.S. JumpPost is looking for a legit UX/UI designer/developer for a small project.  holler

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    I’m a NYC based investor and entrepreneur. I've started a few companies and a venture capital firm. You can email me at Jordan.Cooper@gmail.com (p.s. i don’t use spell check…deal with it)

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