NEGOTIATING TERM SHEETS: Longer time than you expect

Nothing goes as fast as you want it to in a startup, especially getting your money!

I've been pacing a recent term sheet move along and see that it is taking much longer than the founders expected. From the emailed term sheet document to close will be at least 60 days, possibly 90.

Meanwhile, cash is going to zero. That means missing payroll.

So the friendly offer of a bridge loan comes - along with the high cost (I've seen a flat 10% of the loan amount [= 10% x 12 = 120% per year] or 20% discount on the price of shares in the deal when it does close). The cost of emergency cash is very expensive.

How do you avoid that trouble and pain?

Simple: Use "The Rule of Two". Plan on the time taking twice as long as you can think, even in your most conservative estimate.

What can delay the close? Here are some I've run into over the years:

= VC takes a scheduled vacation
= Holiday interrupts the close (Chinese New Year)
= Key person had to go on jury duty
= Wife got into a car accident
= Company financial forecast is a disaster, had to be redone from scratch
= Legal documents on ownership of intellectual property were not done
= And a thousand other delaying reasons!

BOTTOM LINE: Entrepreneurs are optimists. We are always too eager and too confident. It is in our genes. So put on your other hat and prepare to raise your money with many months of extra time. That will keep your competitive advantage strong! I wish you much wisdom.

Comments

[Michael Ostendorff]

You can find out the deal terms of other U.S. venture backed investments by going to www.pedatacenter.com.

[John Nesheim]

Boris, the term sheet is not a contract. It is a letter of intent. So beware! The cash is not in the bank until the cash is in the bank. The VCs (or you) can stop at any moment for any reason.

[Boris Schwartz]

John,
as far as i understand after the term sheet is issued, the company and investors are enter into due diligence process. is something else can prevent from the cash be transferred to a bank?