The VC Fundraising Process: Receipt of Term Sheets

Term sheetIf you’re following along with our series of posts on the venture capital fundraising process, the next step in the process is the receipt of term sheets from prospective investors.

This is where it all starts to happen. All of the hard work you’ve put in to this point starts to pay off with the first non-binding term sheet. These can often be exploding or expiring in anywhere from 24 hours to 45 days. (This is done to minimize your ability to shop the term sheet to other investors to get a better deal.)

If your company is particularly strong, you can often overcome these provisions with confidence and the knowledge of your company’s true value. VCs don’t like to compete for a deal and they often try to strong-arm companies into accepting their term sheet. If they do this to you now before you have a formal business relationship, imagine how they will act once they have even more control over your future.

Understanding what a VC can bring to the table in a deal beyond their capital is important regardless of whether the deal is in tech or health care. A good VC can provide a network of potential partners, key employees, potential acquisitions, top-tier service providers and other key advice all “free of charge,” in return for their percentage of the company and all of the preferred terms that come with it.

In addition to legal review of the business plan/PPM, this should be the stage where more heavy involvement with your attorney should start.  Make sure to have any incoming term sheets reviewed by counsel before returning to the investor.  Trying to renegotiate a term sheet with provisions that you previously agreed to is difficult, bad form, and avoidable.