Article - ASK AN INVESTOR: I SIGNED A TERM SHEET,

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Stick to your terms

Term sheets exist for a good reason. They allow the parties to hammer out the main business terms of a deal before introducing serious legal effort, which, as we all know, can be costly. A term sheet represents a good faith agreement between a company and an investor to move forward one financing transaction under the major terms outlined in it.

Term sheets are typically “non-binding,” meaning that there is no obligation on either party to actually consummate the transaction. However, investors like myself take them very seriously. Good investors won’t issue a term sheet until their business diligence is done and they are very confident that they want to do a deal with you. VCs know that their reputations are on the line and that rescinding a term sheet altogether or changing the major terms after signing is bad behaviour that gets talked about widely.

Control your legal costs

The best way to keep a steady pace on both sides and march towards an expedited close is to set a firm closing date early in the process with your legal team and communicate to your lead VC and her legal team.

In terms of a closing date, you should develop a firm reason why you need the financing closed by such and such a date. This could be along the lines of ‘we need the money to finance a big inventory buy, or we need to takeover a new lease, or we need to make a major senior hire, or we are looking to announce on stage at a certain customer or industry event.’

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