Deals Start With The Term Sheet, AKA The VC Handshake

When you are just getting into venture capital, landing a job is the top priority – and that’s obviously very tough work. Thing is though, once you check that box, that’s when the real work begins.

See, VC is a results-driven business, and the stark reality is that to move up – or even just stay in good standing in this tightly-knit industry – you need to make deals.

And all deals start with the term sheet.

The term sheet is an agreement between the investor and startup laying out the basic conditions under which an investment will be made. Inherent to this document is the understanding that more complex, detailed documents will eventually be developed and signed down the road. This is just the first step in that process.  

Essentially, it’s like a handshake.

It all starts on the investor’s side.

As the VC, you’ve done your due diligence, you like the company, and you’ve made it clear you’re ready to invest.

Likewise, the startup founders are more or less on the same page. They are ready to bring you aboard and give up equity in their company – their baby – in return for your help and capital.

One thing that’s important to keep in mind is that term sheets are non-binding.

Brock Blake, CEO of Lendio, the largest small business loan marketplace in the U.S., wrote in Forbes that he would guess about 90 percent of signed term sheets turn into funded goals, while the remaining 10 percent fall apart.

Still, he also did not downplay the achievement of reaching the term sheet stage either.

“A term sheet is an enormous milestone for an entrepreneur in the fundraising process,” Blake writes. “Once you have a term sheet, it prompts other potential investors to accelerate their evaluation, and it sets in motion the next stages of closing the deal, including deep due diligence and legal review… The negotiated and signed term sheet represents an exciting day for the investor as well. Once both parties have executed the term sheet, the investor knows they are the preferred investment group and can worry less about courting and more about due diligence, legal, and sealing the deal.”

While all that sounds rather momentous, the actual, physical term sheet itself is simply a small document, typically no more than a handful of pages long.

To reiterate, it really is just the beginning.

Yes, the term sheet has all the juicy, newsworthy details – including how much a VC is investing in a company, the pre-evaluation behind that company, and how much equity the company will exchange in return for the funding – but there is still a long way to go.

After you have a term sheet, there are normally another five documents you will need to agree on before closing a deal including the stock purchase agreement, investors rights agreement, certificate of incorporation, ROFR and co-sale agreement, and voting agreement.

But hey, we’re getting ahead of ourselves.

Before you learn about the other documents, you should probably master all the other key phrases on the term sheet.

Don’t worry, we’ve got you covered there.

Over the next few weeks, we’ll be doing a deep dive on the VC term sheet, explaining all the little details that go into it so that the next time you’re having a look at one, you’ll understand exactly what it is you’re reading.

Stay tuned!