Receiving a Term Sheet from a VC usually takes weeks of work and is often accompanied by understandable euphoria. However, signing a Term Sheet for a “priced round” is a much larger commitment than for a SAFE/Convertible Note. Thus, you need to ensure you follow the right steps to secure the best deal for your company. Here’s what you should do after receiving a Term Sheet.
Consult Your Lawyer & Advisors
What: Send the Term Sheet to both your lawyer and your trusted advisors (those with term sheet experience such as existing investors, mentors and experienced founders). Ask if any of the terms are unusual or concerning and for their overall thoughts on the deal.
Why: Founders have generally seen a lot less term sheets than lawyers and advisors have, so it’s important to understand the legality of the terms and potential points of negotiation. The most significant items within Term Sheets, outside of the price and investment amount, are usually: Board control, Board approvals (budget, hiring etc), the equity preference stack, and the employee stock option pool.
When: Do this within 24 hours of receiving the Term Sheet, so you can have an initial response back within 3 days.
Inform Other Potential Investors
What: Tell all other potential lead investors in your fundraising pipeline that you have a term sheet but would like to complete the conversation with them. This means you want to do enough meetings for them to make a decision. Typically, most investors will quickly say “No”. While other investors who are interested will want quick turnarounds on material requests. Expect after-hours meetings to have a realistic chance of getting to a “Yes” in time.
Why: It’s much easier for you to negotiate a term sheet if you have more than one party interested. Two or more Term Sheets means you will have a better chance of getting your preferred terms and a backup option if your first choice backs out.
When: If you’re likely to sign the Term Sheet, do this within 24 hours. Otherwise wait, given most investors will say “No” at this point.
Check Investor References
What: Ask for references from the VC who gave you a term sheet. References should come from their portfolio company successes and at least one failure. Go through their companies and search startup news sites, to find off-book references that haven’t been prepared by the VC before your reference calls. On these calls, focus on how the VC behaved in pressurized situations such as when you’re: fundraising, discussing M&A, or running low on cash.
Why: Accepting a VC onto your Board of Directors is a marriage without the option of divorce. You need to know the reality of working with this person before you sign a deal.
When: You can begin outreach to off-book references within 24 hours. However, wait until you have the main terms negotiated before asking the VC for their pre-selected references; as this could influence the negotiation and also helps provide a delay to complete the conversation with others.
Getting a Term Sheet is a major milestone for most startups. Move quickly to the closing items and make sure you land a great deal for your company.
This article is part of a series on Seed Fundraising.
1. When to Raise Money
2. How to Build a Deck
3. VCs vs. Seed Funds vs. Angels
4. How to Get a Meeting
5. How to Request an Introduction
6. How to Get Early Momentum
7. How to make a Good Pitch Great
8. The 5 Most Common Pitch Mistakes
9. Meeting Requirements
10. The Basics of Meetings
11. How to Handle an Angel Investor Meeting
12. Know these Numbers for your VC Meeting
13. 4 Investor Gotcha Questions
14. How to Follow-Up After an Investor Meeting
15. How to Close the Lead Investor
16. The 4 Stages of a VC Process
17. How to Raise a $2 Million Seed Round
18. Go from Investor YES to Cash in Hand
19. When Investors Say Yes but Mean No
20. When and When Not to Use an Investors Name
21. Stop Making These Common Fundraising Mistakes
22. How to Avoid Bad Terms that Kill Startups
23. What to do After Receiving a Term Sheet
24. Term Sheet Problems Part 1 — Money Talks
25. Term Sheet Problems Part 2 — Boardroom Blues
26. Term Sheet Problems Part 3 — Side Letters
27. 10 Traits of Successful Founders
Sterling Road invests in pre-seed B2B startups based in North America. Full process here: sterlingroad.com/process.
You can reach me here: firstname.lastname@example.org
Thanks to Kaego Rust for their help on this article.
Photo by Jonathan Chng