term sheet

VC Fund Raising Manual – 8 Legal Work

You did it, you signed a term sheet with a VC. What will happen now is that the VC firm will do some final due diligence, and you will start to put into legal form what you have agreed in the term sheet.

This article is part of the a series, you can find the index here.

Here is what should happen now:

– Accounting due diligence

– Legal due diligence

– Drawing up the investment agreement and amendments to your company’s articles of association (called differently in different countries)

What should NOT happen (in a VC deal, buyouts are different):

– Further commercial due diligence

– Further references on founders

– Further technical due diligence

– Any other funny stuff

The work items directly above should have been completed before you signed the term sheet. I suggest you do not sign a term sheet before they are complete. Again this is true for VC deals, in buyout deals, the deal process is slightly different.

A quick word on drawing up the legal documents. What frequently happens is that the VC will use and amend some sort of ‘standard’ document that they use all the time. This standard document can, for example, be based on suggested documents drawn up by a venture capital association. The VC will tell you these documents are totally ‘standard’. My thoughts on this are as follows:

– Documents drawn up by bodies that represent VCs are not unbiased. They are in favor of the VC firm.

– Standard documents are usually the very long versions. There will be a lot of paragraphs in here you can do with out.

– Any contract is a commercial agreement before it is a legal agreement. The legal form and language are there to serve a commercial purpose, not the other way round. Discuss the commercial aspects with the VC directly, not via the lawyer, and come to an agreement. Then instruct your lawyers to put that in legal wording. Use your lawyer effectively.

Expect this process to take some 4-8 weeks. If everything goes well, then you are ready for the final stage: getting the money in the bank.

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VC Fund Raising Manual – 7 Term Sheet

When you are out VC fund-raising, getting a term sheet from a VC firm is the crystallizing moment of your relationship with that firm. If you sign it, you are very close to getting the funding. But before you sign it, you need to negotiate it.

This article is part of a series, you can find the Index of the VC Fund Raising Manual here.

Negotiating a term sheet is difficult, largely because you don’t know what the real market value of your company actually is. How do you establish that? The VCs see lots of deals, they know the market better than you do. How can you equalize that position? There is only one solution to this problem:

Unless you have multiple term sheets on the table at the same time, you have no way of assessing what the real market value of your company is. Also: being able to walk away from a deal will put you in a much stronger negotiating position.

Imagine it like looking for a new job. Ideally, you want multiple job offers at the same time, so you can choose the best one. It is the same with VC funding.

The secret to successfully raising funding is that all communications that you have with VCs must lead to a point in time where all the different people give you a term sheet. In the best scenario, you get them all on the same day. If not, then you get them in the same week. Getting them all in the same month is most likely too far spaced apart. In order to be able to receive multiple term sheets at the same time, you have to start talking to VCs at the same time. Ideally in the same week. Pursue VCs in parallel, not in sequence.

For all other aspects of how to negotiate a term sheet, I suggest you visit Venture Hacks. I think the picture below speaks more than a 1000 words about how useful that site is for ‘hacking’ a term sheet, enjoy:

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