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 think there is one metric that can be used to measure the value of a human life and that’s impact. How did you change things? How many people did you touch? How different is the world because you lived in it and how positive was the change that you affected? (p.s. i don’t use spell check…deal with it) You can email me at Jordan.Cooper@gmail.com

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