Term Sheet Purgatory

There’s a lot of advice about (1) how to attract VCs, and (2) how to negotiate a venture capital term sheet. Both sets of advice tend to ignore the gap between an investor’s expression of investment interest and your startup’s receipt of the term sheet. I refer to this waiting period as “term sheet purgatory.”

Term sheet purgatory can seem like is an eternity for a startup, although it may last from one week to over one month. Usually, the investor is just prepping the field to make the investment. While progressive discussions with an investor about the investment are fine and most revolve around pre-diligence matters, sometimes these discussions shift towards the pre-money valuation and investment amount. And this has potential negative consequences for the startup.

It can be a mistake to arrive at a consensus with your investor on pre-money valuation & investment amount before receiving the full term sheet. Terms like the option pool, liquidation preference, and board composition are just a few other investment terms that have a meaningful impact on your startup. You’ll feel real solid about that $6,000,000 pre-money until you receive the term sheet and it specifies a 25% option pool, 1X participating liquidation preference, and an investor-favorable board.

Of course, you can re-negotiate the pre-money and/or investment amount, but it still makes for potentially awkward conversations and/or feelings of mistrust. Neither is a good way to kick off your relationship with your future investor. (Even worse, a startup may feel like they can’t re-negotiate because they’ve already “agreed” to those numbers.)

Thus, if your potential investor continues to verbally discuss investment terms with you, consider asking for the term sheet.

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Even if you are comfortable negotiating verbally on one facet of your startup’s capital raise and blindly on the rest — 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. This may be the quickest way to get you out of term sheet purgatory and avoid negative consequences along the way.

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2 thoughts on “Term Sheet Purgatory

  1. Hi Ryan,

    I know you limit your practice to tech companies and were a cause related clothing company, but …

    I came across your site when I was researching post money valuation calculators. I just finished up the business plan and I’m stuck on a post money valuation for my company. I personally invested $55,000 of my own money and got a seed investor that placed $75,000 with the company for 9% ownership. My sticking point is how do I determine the post money valuation factoring in my investment? Do I just go with the standard model which yields a post money valuation of $1 million?

    We are currently talking with two VC companies.

    By the way: Great site, packed with a lot of helpful information.

    Any information would be appreciated.

    Thank you,


  2. Hey Ryan. Great post with some real nice insights. It seems like your firm is located in California. Are you licensed in other states or can you consult in other states? I do not have a venture capital problem now but I was wondering if I can call on you if I do have a problem down the road. I am a Philadelphia tax attorney.

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