Tag Archives: Term sheet

When to prioritize investors during your fundraising process

I was recently speaking with a Turkish entrepreneur about the company’s fundraising when he asked which funds he should prioritize. The company has started discussions but has yet to receive a term sheet from any fund.

In a market where capital is plenty and there are many funds, you’re unlikely to have the time to have deep discussions with each. As a result, you need to prioritize who you reach out to and have deep dives with, even before receiving a term sheet.

However, in a market like Turkey where there are less than a dozen tech startup investors with the capacity to invest a sizable amount in your company, you can actually have deep dives with each interested investor. In fact, you should until you receive a term sheet.

The reason is that if you prioritize before receiving a term sheet and the funds you prioritized don’t come through, you’ll have to start from scratch with the unprioritized funds. This means, at best, a delay in closing the funding which will grow your business, and, at worst, not enough time to close the funding necessary for your business to survive.

Once you hopefully have multiple term sheets in hand, that’s when you should prioritize. Not before.

Term sheet making and taking

In venture capital, sometimes you have the luxury of being a term sheet maker. In other words, you get to have a strong say on the terms at which you’re investing in a company.

The conditions under which this is more likely to occur are when there is limited competition for the deal, you have a unique ability to add value to the company which is recognized by the founder, you’re investing a relatively large check size, and, better yet, a combination of multiple of these conditions.

But often, these conditions aren’t present. There are multiple bidders at the table, each of these bidders is in a position to add value to the company or at least this is what’s perceived by the founder, and your investment amount is relatively small.

When this is the case, you often have to take the term sheet that is put forth by the company. In other words, the company dictates most of the terms.

While this is suboptimal from an investor perspective, not doing these deals would mean missing out on some great companies. In fact, some of the conditions which produce an environment where you need to accept being a term sheet taker are the direct result of the quality of the company. For example, higher quality companies attract more bidders to the table and this gives the companies a stronger say on the investment terms.

When this is the case, if you really want to be part of the company, you have to take the term sheet on the table.

Standard terms

Entrepreneurs see just a few term sheets while building their startups. This is especially true for first time entrepreneurs.

Since investors work with many companies, they see many more term sheets.

As a result of this discrepancy, entrepreneurs often come across term sheet terms that they don’t understand, find clear, see the purpose of, or find fair.

When this happens, one of these three scenarios plays out.

1. The entrepreneur doesn’t ask about the term with the goal of trying to understand it. This is the worst possible scenario because what you don’t understand or find clear often comes back to haunt you in the future.

2. The entrepreneur asks about the term and digs in until he really understands and accepts the reasoning behind it. If it’s a red line he absolutely doesn’t want to cross, he refuses the term.

3. The entrepreneur asks about the term, is told that it’s a standard term, and accepts this. This is just as bad as not asking about the term because it results in the same lack of understanding. There is no such thing as a standard term. Even if a term is indeed found on most term sheets, it’s there because it addresses a possible future scenario where there may be a divergence between the objectives of the entrepreneur and those of the investor. With the benefit of having seen many term sheets in the past, it’s the investor’s responsibility to explain the reasoning behind each term that the entrepreneur seeks to understand. If the investor says that it’s just a standard term, they either don’t understand it or don’t want to share the reason for it. Both are red flags.