After reading Bill Burnham’s recent post on what to do after you get your first term sheet, I was reminded of a situation I faced when I was raising money for my previous company, Resonate.
Bill’s advice is sound: First and and foremost, once you get your first Term Sheet, go out and get your second. Great advice!
His next point was ignore expiration dates since they don’t mean anything and, as long as you are negotiating in good faith, they’re not going to pull it.
This is probably true, but a key point is ‘good faith’.
When I was raising money for Resonate, I had a couple of Someone Else’s Term Sheets from ‘find a lead investor and I’ll follow’ kinds of firms. The first one of these I got had me excited, until I realized that no one wanted to invest along side of these kinds of firms…..
Then one day I got a call from a VC I had been talking to from a very prominent (and successful) Sand Hill Road firm and he asked me to come in and talk about some of their remaining diligence items. They had been conducting due diligence for several weeks and had aleady met the team, talked with users, even did a technical review of our software. We had already presented to all their partners and thought we had answered all of their diligence requests.
When I sat down with the VC, I was stunned to learn that they didn’t have any further questions but that he and his partners loved the company and wanted to invest. I could not have been more excited. I finally got my first, solid ‘I’ll take the whole deal if I need to’ term sheet.
We went through the terms of the deal and they all seemed pretty standard (and reasonably attractive), until he mentioned that I’d have to decide within 24 hrs. That seemed bizarre, but I left the meeting telling him that I’d talk with my board and get back to him as quickly as possible.
When I consulted with my attorney and board on this their advice was emphatic: Ignore the time bomb. “If it’s a good deal today, it will be a good deal next week” I was told. “They’re not going to walk away from a deal they like over a bogus expiration date”
We were in the diligence phase with some other firms and wanted to wrap them up prior to making any decision. Negotiate in good faith and you’ll reach an agreement. It all made sense.
Later that day I called back the VC to tell him that I was excited about having them invest, but could not decide within 24 hrs because we couldn’t reasonably negotiate the terms of the deal to make a decision so fast.
It was at that point the VC told me: “No, Chris, you don’t understand. The deal really does blow up tomorrow. If you don’t accept the deal, we’re going to invest in your competitor.”
Stunned, I hung up the phone and called my board. They were unanimous. Walk away.
So I did. When I called him I told him that I thought the time bomb was unrealistic and his discussions with my competitor should have disclosed sooner. I also told him that I didn’t like their approach and even if the deal didn’t expire, I wouldn’t accept it.
What I didn’t tell him was that I thought he was a prick and couldn’t possibly work with a firm that kicks off a relationship with a new portfolio company under such circumstances.
Later that month, I got another term sheet from an even more prominent Sand Hill Road firm, which we accepted.
Resonate went on to be quite successful. That other company, not so much.
I occasionally run into that VC and we’re both cordial and nice. I’m sure he remember giving me the term sheet because he talks about ‘loosing the deal’ to the other firm. But I doubt he has any recollection of the time bomb.