Fundraising · Term sheet

Term sheet specifying investor will close the round - worth anything?

Greg Lipinski Patent Examiner at USPTO

July 7th, 2016

I'm learning the hard way one of the principal rules of fundraising - no one wants to be the first investor. I recently spoke with an investor who said he'll put down in a term sheet that he'll invest 33% of my target raise after I raise the first 33%; he hopes I can use this term sheet to pressure others into kicking in that first bit. Is this common? Would other investors be swayed by this? Keep in mind that the the investor told me that if another deal comes his way before I close my initial investment, he reserves the right to pull out. 

Rob G

July 7th, 2016

If we had $1k for every time we heard that during our first raise we would have been over subscribed :-/ .   I think it's natural, albeit frustrating, for investors to want validation from other investors.  My experience from previous startups is similar - plenty of investors saying they want to invest... right behind the lead. Eventually we found a lead so don't get too discouraged.   Part of that seems to be that they want someone else to do the due diligence heavy lifting. Whether this investors "commitment" will sway others i think depends more on this investors reputation.  If s/he is known to like to lead rounds his/her position on your deal might raise eyebrows, but again, his/her 'commitment' to follow someone else's lead is common.  Writing it into a terms sheet could help create a sense of urgency or scarcity which can help sway investors assuming they respect (or even know) this investor.  Remember, the only thing investors hate more than investing in a bad deal is missing out on a good one. He wants to reserve 1/3 of the deal if it becomes 'hot' and he also wants an out if something better comes along (i.e. he changes his mind for any reason). you should have an out too, i.e. if he is known to be difficult to deal with and his presence is a deal killer for others you should be able to bump him. my $0.02. good luck.  

Sidney Amster Member Investors Circle

July 7th, 2016

I can appreciate the entrepreneur's frustration and as an angel investor am not particularly impressed by those investors who make "conditional" verbal announcements with numerous outs.  However it is also the entrepreneurs responsibility to 'nail down' these types of investors with both carrots and sticks - the carrot could be a financial incentive to lead and the stick can be not playing the game - stating that there will be a close under the terms announced and a second opportunity later with different terms. Another approach is to say fine and can you recommend a lead and can i use your name to reach out to this person/group. If the answer is not credible then the investor may not be credible for you.


Martin Omansky Independent Venture Capital & Private Equity Professional

July 7th, 2016

This is a normal ploy. Investors use this reasoning all the time to deflect deals they either don't understand or they are reluctant to endorse. Assume you have nothing. If you do find a lead investor, you should have no trouble finding others to follow them in. Sent from my iPhone

Steve Simitzis Founder and CEO at Treat

July 7th, 2016

I wouldn't sign the term sheet. Other investors will want to see commitments, not conditional commitments, and will view the conditions as a signal the other investor doesn't have full conviction. You can thank the investor but politely say that you are only reserving room in the round for commitments. You'd be happy to accept a term sheet for an investment, otherwise you can keep them in mind if there's still room as you're closing.

Jerome Peloquin President, Family Fish Farms Network, Inc.

July 7th, 2016

You can use a convertible note called a "convertible debenture," that allows one to start with a loan and offer the option for the loan to be converted to stock at an insider rate. Remember you can also use the proceeds from the note to buy out the first funder. It is a common practice. j Jerome Peloquin President The Family Fish Farms Network, Inc. 717 Lawrence Street, NE Washington, DC, 20017 cell: (410) 227-0498 (Skype) fishfarms1 LinkedIn Profile email: aquaponikus@gmail.com website: www.thefamilyfishfarmsnetwork.com We grow healthy local food ... save fresh clean water ... create decent paying jobs.