01 May 2009

Closing Term Sheets Quickly (+ Avoid the Co-Investment Term Sheet)

Here's an interesting post from the guys over at VentureHacks about closing term sheets quickly.

http://venturehacks.com/articles/closing-quickly


I like the advice...one of the biggest pains is to get VCs to move on your timetable. About a year ago, I was working with a startup raising a series A round; we had a ton of interest but a hell of a time getting the round to close.

On more than one occasion, we would have a solid bite from a VC who wanted to invest. They went as far as putting down a term sheet. However, they took a somewhat passive-aggressive approach by stating that they didn't want to lead the round-- just "co-invest."

In other words, they wanted to ride on another VC's coattails and wanted the entrepreneurs to bring them the coat.

This was highly disruptive for several reasons:

i) There were no-shop clauses in the term sheet, effectively giving the VC the right to approve or disapprove of who the co-investor would be. This limited (somewhat) our ability to drum up additional excitement for the deal and increase our bargaining leverage.

ii) The term sheet(s) always had an expiration date, and during that time, we would be engaged in the due diligence process with the VC. Even though we had our DD package ready-- as this article suggests-- it takes a huge amount of time, as each VC has a slightly different list of things they want to see. There is a lot of jumping through hoops, a lot of meetings and calls-- all of which can distract from the process of building the business.

iii) The fact that it was only a co-investment term sheet muted the excitement for the deal. In other words, when we would go out and meet with other interested VC firms about being the lead, they would invariably wonder why, if it's such a hot deal, the first VC didn't want to snap up the whole round (in this case the reason was valid...the 1st VC was a strategic investor-- part of a larger media company-- and rarely led deals).

In the end, it all worked out for my client; we successfully closed the round and are off to the races. But the net takeaway is, "beware the follower or co-investment term sheet" as it can really hinder the startup. For the VC putting one down, it's lke an option to invest that costs them nothing-- and it's always in their advantage to wait and watch the startup, versus cutting the check...

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