Startups · Fundraising

If someone gives you a term sheet what are the chances of getting funded?

Angel Otero Consultant en Freelance IT Consultant & Service Provider

September 17th, 2016

Correct me if I am wrong but the term sheet is not a binding agreement. I actually had a bunch of friends that received the term sheet decided to increase the monthly costs and had to end up shutting down as the investment finally did not happen. What do you think are the chances of situations of this nature happening?   

Bruce Jackson M&A; private placements; builder of management and financial infrastructures for young companies

September 17th, 2016

I assume you're talking about equity (in which case other comments about SBA, hard money, etc., do not apply and, in any event, the answer to your question will be different if you're talking about debt). First, a deal is not a deal until you have your hands on the cash, so it would be highly unwise to start spending in anticipation of a possible injection of capital. Second, a term sheet is just that . . . nothing more that a statement of possible terms, and definitely not a binding agreement (except, perhaps, in respect of such things as a no-shop clause). Term sheets might not lead to a definitive investment agreement for many possible reasons. The answer to your question depends in part on the specific investor you're dealing with. In the first meeting with an investor, probe their internal process so you can get a sense of what stage of the process they typically issue term sheets.  Talk to other companies that have actually been funded by the investors that give you term sheets. See if you can detect a pattern of behavior. And remember that investors' M.O. vary quite a bit. Some will issue a term sheet relatively early in the process of reviewing your opportunity and then do the bulk of their due diligence. This ties you up and, if a definitive offer emerges, it might look substantially different from the term sheet's provisions. Try to shy away from investors like this.  The ideal investor is one who issues a term sheet only after completing much of their due diligence and becoming quite confident that they'll move forward, and do so on terms that are the same as or substantially similar to the ones set forth in the term sheet. Of course this does not guarantee that they will close the deal (bringing us back to my first point) so operate on the assumption that you have no injection of capital until the cash arrives in your bank account.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

September 17th, 2016

I conduct due diligence for VCs and am rarely given more than 30 days to complete it. When I represent a company looking for capital I always advise my clients to be prepared for the due diligence review before they start the funding process. I can usually deliver everything the VC should want to see within a day or two. When I negotiate a term sheet for either side, it includes a timeline. The VC does not want to be sitting on cash if the deal looks good. The company does not want a better deal to come along and have the VC invest elsewhere.  Funding is a business, not a game. If it looks good, you work to get it done. If problems come up, you fix them.  Often the funds are disbursed in tranches against pre-determined milestones. The idea of getting to know the entrepreneur like you are dating is absurd. How the entrepreneur presents themselves, where they have been and what they have accomplished before and how their references speak about them is telling.  VCs don't want to bond over white water rafting.  A good VC understands that you are very likely to fail. They look for reasons why you might succeed.  Everything else is superfluous.  And to the gentleman who said that his friends spent money before they got it,  they were not going to succeed anyway. Its very hard to succeed if you are that dumb.

David M

September 17th, 2016

There is a case for due diligence before a terms sheet and also after. Ideally, it makes sense to do some beforehand. But if you are dealing with many potential investors at a time, it may not make much sense to invest extensive time until first finding out if you will even be able to reach mutual terms in the first place. There are various levels of due diligence, and depending on scope and type of the investment more or less may be needed.

The biggest issue I have seen with terms sheets and LOI's is the entrepreneur puts way too much stake that the deal is going to happen. Until you have a long form contract signed and money is in the bank, there is no money as others have alluded to. If you are to terms sheets certainly be positive and optimistic, but don't let it derail your pursuit of any and all investors. Not to mention if you have several potential investors that gives bargaining options. With this though, I am speaking more with regard to private investors, not institutions.

Barry Burr founder, Barry Beams llc, a startup to re-light your night.

September 17th, 2016

IF you and the investors are dealing straight with each other. then its 99+% yes.
You need to be sure you have your own legal representation make the operating agreement, business formation, and other items, independent of the investor's lawyers.
Different from what's mentioned above, term sheets come after Due Diligence is completed. In my case, six months of no holds barred questioning and research into the viability of my technology, product, designs, and most important, the investors becoming confident that I can deliver a profitable venture.  If they don't believe in you personally, then nothing else matters.

Nawaz Ahmed Founder CEO 5n Business Consultants

September 17th, 2016

Being consultant for startups the situation you have given does happen. Nothing new in it. Till funds landing in your account any type of agreement to transfer funds is null and void till the transfer happens it's like innocent till found guilty

Bradley Jay Experienced Corporate Finance and Private Equity Executive

September 17th, 2016

Term sheets are usually attached to a letter that explains where the investor is relative to their commitment. Investors want to know if their terms are in the ball park. As for increasing the monthly cost, doing so changes the amount of capital required to get to the next milestone. As a signaling event, this should be communicated with great care, especially after receiving a term sheet from a potential backer.