There’s plenty of advice on (1) how to attract VCs and (2) how to negotiate a venture capital term sheet. What gets less attention is the messy middle, the period between an investor expressing interest and you actually receiving a term sheet. I call that waiting period term sheet purgatory.
Term sheet purgatory is an eternity for a startup, even when it “only” lasts a week or two. In practice, it can stretch from one week to over a month while the investor does internal work to get comfortable and tee up the investment. During this phase, it’s normal to have progressive conversations that touch on diligence, timing, and process. The risk is when those conversations drift into “agreeing” on valuation and check size before you see the full set of terms.
Why verbal agreement on valuation can backfire without a term sheet
It can be a mistake to reach a “consensus” with an investor on pre-money valuation and the investment amount before receiving the full term sheet. The reason is simple: valuation is just one variable in a bundle of terms that determine economics and control.
When you “lock in” the headline number too early, you may unconsciously treat everything else as secondary. That sets you up for whiplash when the term sheet arrives with terms that move real value away from founders, or shift control in ways you didn’t anticipate.
Other terms that can matter as much as valuation
Terms like the option pool, liquidation preference, and board composition are just a few examples of provisions that can meaningfully impact your outcome. You’ll feel great about a $6,000,000 pre-money until you receive a term sheet that includes a 25% option pool “pre-money,” a 1x participating liquidation preference, and an investor-favorable board.
Depending on the deal, other terms can also change the practical value of the “headline” valuation: participation caps, dividends, pay-to-play, pro rata rights, protective provisions, founder vesting refreshes, and the scope of drag-along rights. You don’t need to memorize every term, but you do want to see the full package before you mentally commit to a number.
Why “we can always renegotiate later” is a trap
Yes, you can try to re-negotiate the pre-money and/or the investment amount after you see the term sheet. But it can create awkward conversations and, in the worst case, feelings of mistrust. Neither is a great way to start a long-term relationship with a lead investor. Even worse, some founders feel they “can’t” re-trade the valuation because they already verbally agreed to the numbers.
What to do instead: ask for the term sheet
So if your potential investor keeps discussing investment terms verbally, consider simply asking for the term sheet. A reasonable investor knows the term sheet is the right place to put the key terms in writing.
Simple script: “This is helpful. To make sure we’re aligned across all the key points, can you send over a draft term sheet so we can react to the full set of terms?”
A quick sanity check
Even if you’re comfortable negotiating verbally on one facet of your startup’s capital raise and blindly on the rest, ask yourself: what’s the point of talking about the color of your corsage if you haven’t received a (non-binding) invitation to the dance?
Request that all key terms of the investment are laid out in front of you in the form of a term sheet. If the investor says it’s “too early,” you can suggest a lightweight draft, even if it is high-level, with the understanding that it may evolve after diligence. The goal is not to freeze everything; it is to avoid anchoring on valuation while the rest of the deal is still unknown.
Takeaway: Treat valuation discussions during term sheet purgatory as preliminary. The fastest way to reduce uncertainty, and avoid preventable friction, is to get the key terms into an actual term sheet.
Ryan RobertsStartup Lawyer
Ryan Roberts is a startup lawyer at Roberts Zimmerman PLLC with more than two decades of experience advising startups and venture capital investors. He is the author of “Acceleration” and StartupLawyer.com.
