Ask an Investor: I signed a term sheet, now what happens?

ask an investor

Welcome to a new BetaKit weekly series designed to help startups and entrepreneurs. Each week, investors Roger Chabra and Katherine Hague tackle the tough questions facing founders today. Have a question you would like answered? Tweet them with the #askaninvestor hashtag, or email them here.


In the startup world, December is a beehive of activity as companies hustle to hit their annual financial goals. We usually see a tonne of activity on the financing side as well. Startups that kicked off their fundraising in September or October are busy courting investors and closing in on new financing rounds from both VCs and Angels. There is a mad rush to sign financing term sheets before people scatter for the holidays to spend well-deserved time with loved ones.

So, what happens once everyone is back from his or her holidays? This week, let’s explore what to do once you have signed a term sheet for new financing. We won’t focus on M&A term sheets in this post, but some of the points below are also applicable to that scenario.

Close quickly

There is a saying that “time kills all deals.” This is certainly true in my experience as a VC. The longer the time that elapses from term sheet signing to close, the more risk that your deal will not actually get done. So your number one job as a founder is to get on a track to close your financing round quick! Risk comes in the form of events or factors both within (more on this later) and outside of your control. Macro events like we saw with the 2008 financial crisis or the 2000 dotcom implosion can render even the best of company financings dead in the water. Or perhaps your largest competitor announces a mammoth financing round in the interim and your lead VC gets cold feet.

Of course, these things are totally out of your control. There’s nothing you can do except move to close quickly. The faster you close, the faster you can get back to building your business.

Close on as much cash as possible

Another important thing to do is to close on as much cash as possible. These days, we regularly see equity financings that have more than one close (or “tranche” of financing) or even have a “rolling close” (where a company can accept investor subscriptions at any time over a specified time period).

Things never go entirely smoothly. You will have bumps along the way, like anything else in StartupLand.

If this is how your financing is structured, focus hard on closing as much as you possibly can on the initial or “first” close of your financing. This will allow you more certainty in scaling up your operations and making the necessary investments in your company more immediately. Speed is your number one advantage as a startup. Along with closing quickly, closing as much as possible as soon as possible will put less of your financing at risk of never closing, due to factors inside and outside of your control.

Hit your numbers!

Nothing deflates a prospective lead investor’s interest more than a company completely missing on the financial projections they provided. Public markets don’t like uncertainty and doubt. Well, I can tell you that private investors certainly don’t like it much either. Make sure you hit your projections. If you don’t, you introduce a serious sense of doubt in the eyes of your investors. They’ll wonder what else they are missing!

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.

Founders should feel the same sense of commitment to a signed term sheet. It’s important to stick to the terms you negotiated in your term sheet. Don’t ask for more than what was negotiated. There will be a bunch of grey areas that are up to interpretation and/or may not have been fully covered by the term sheet. For these, talk to your advisors, and especially your lawyer, about what is market and what is fair. You should proceed to close your term sheet in good faith. Remember you will likely be working with your VC for many, many years to come so you want the tone of the relationship to be healthy once the money has been wired.

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.

Be sure to tell your lawyers that you hope to continue the relationship with them far beyond the close of this transaction and that you will be evaluating them based on their advice, accuracy, cost, and their ability to work quickly to close. Thankfully, there are many good lawyers (ping me if you need a recommendation!) in our ecosystem who are excited to work with startups, understand the criteria they will be evaluated on, and take a long-term view to working with startup clients.

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.’

A quick word on cost – your term sheet should include a capped cost of legal work on both sides. The expectation is that your lawyers will come in at or under this cost level. Good startup lawyers know and respect this.

One thing that I have used with much success over my career is the “all-hands call.” Near the end of a financing transaction, you may find the lawyers are arguing with each other about what you see as seemingly minor issues or that a few loose ends are just not getting resolved and are dragging out your closing date. Remember, if you have a good startup lawyer they want to get this closed as quickly as you do and they are just doing their job trying to protect you. They are not trying to deliberately ring up your legal bill.

Treat them as you would treat any valued partner. One way to get everything to a quick resolution is to have a conference call with your lawyer, along with your lead VC and their lawyer (the aforementioned “all-hands call”). Ahead of the call, make a list of the open issues and communicate an expectation that on this call both sides intend to resolve each outstanding issue in real-time.

Work through the issues one by one on the call. On some issues, it may be necessary for one of the sides (with their lawyer) to break off and do a “sidebar” conversation outside of the call. Allow that side to go on hold and jump off the call to discuss the open issue. Again, however, the intent is that everyone is to resolve all the issues before getting off the main call. So the expectation is that they jump off to discuss and then jump back on with a resolution or proposal to discuss in real-time with you.

Control the message

It’s virtually impossible for a seed or Series A startup that is raising money to not have the news disseminate to the greater employee base. The CEO is on a plane more regularly. Strange investor types are coming in for meetings and company tours.

Try to minimize the distraction of a fundraise and closing and have people focused on their jobs. Lead by example. Keep your emotions and excitement in check.

Many great founders I have worked with actively seek open communication about everything going on within a company. Raising money is such a time-consuming and important task for a startup; naturally, it gets communicated across an organization whether by design or not. However, it is important to communicate to your team that the deal is not absolutely not done until the money is in the bank. Try to minimize the distraction of a fundraise and closing and have people focused on their jobs (this is hard to do!). Lead by example.

Of course, you will be pulled into countless meetings and calls, but make sure you are visibly working on building your company at the same time. Keep your emotions and excitement in check. Provide regular updates on the fundraise to your team, but also communicate the expectation that it is business as usual around here.

Stay focused

I’ve done dozens of financings over my career. I can tell you that things never go entirely smoothly. You will have bumps along the way, like anything else in StartupLand. An investor will decrease the amount that they want to invest, a verbal commitment from a non-lead investor will suddenly disappear the day before closing, your investor’s legal team will get caught up on a seemingly minor point, you will have an early shareholder upset about the valuation you are getting on this round, a one-tranche financing will turn into a rolling close, and on and on.

Serial entrepreneurs, I see you shaking your heads in agreement on these. Been there, I get it. Keep in the mind the points raised above, deal with whatever comes up and keep pushing to a close. This will all be behind you soon and your company will be in a better position because of your hard work!


Katherine’s take:

Katherine Hague

I think the most important factor Roger covers here is the importance of timing. An investor or an acquirer going dark after signing a term sheet would make me very worried. Our acquisition term sheet was actually negotiated over the Christmas holidays. When people are motivated, they should be eager to keep the ball rolling. Every day that goes by before a deal is closed increases the risk that the deal may not go through at all.

My best piece of advice on closing a deal faster would be to pick a date that you plan to close the deal together at the time of signing the term sheet. Ideally, anchor that date to an external event. Perhaps a date when you plan to publicly announce the deal publicly, the date that your lease comes up on your office (and you’d have to move in with your acquirer), or the date of an upcoming board meeting. Something that can’t easily get pushed and that gets both parties working towards the same goal.

Rally everyone working on the deal around hitting that close date. Getting to a close date faster not only means that there will be less risk of external events arising and derailing the deal, but it also gets you and your team out of limbo faster – allowing you to move on to building the business or integrating with your acquirer.

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Roger Chabra

Roger Chabra

Roger Chabra is the CIO at TribalScale, a global provider of digital products & companies for mobile & emerging technology platforms with offices in Toronto, Los Angeles, Dubai, San Francisco and New York City. You can follow Roger on Twitter at @rchabra