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June 29, 2017


There are few events as dangerous as seeing a term-sheet pulled by a VC after you have signed it, yet it happens more often than you might think. It can be a life threatening moment for your company as you might have signalled to other interested investors that you committed elsewhere, and may never be able to revive your round.

Here are some true stories:

  • A tier I investor once messaged a founder telling him “I’m out”, never called him to apologize or explain.
  • When we were raising Series B for Zoopla, the incoming investor called me on the day of the Obama inauguration, a couple of days prior to the close, telling me he got cold feet because of the housing market crisis. I bridged the company as best as I could and we scrambled to find more cash. Turned out to be the best check I ever wrote, but man, not a pleasant moment.

It’s important to understand why it happens and how to avoid the issue in the first place.

Not all term-sheets are created equal

Some venture funds issue term-sheets fast. When the market is moving fast and FOMO runs high, some investors will do anything to lock a deal down, including issuing signed term-sheets before they have done all their work or aligned their partnership on a “yes”. It’s poor practice, but it happens.

Some venture funds simply process opportunities differently and issue terms ahead of doing some of the work. I get it, and as long as they are *extremely* clear with founders I guess it’s not exactly shady, but I still don’t like it.

A good term-sheet is an unqualified term-sheet

For me issuing a term-sheet should be subject to a high level of scrutiny, resembling what reputable journalists at the New York Times might do in terms of corroborating sources (ha!), and ideally:

  • All business / tech / product due diligence is done
  • (Sufficient) personal referencing done
  • Partnership meeting has happened and partnership has said YES!
  • Any open diligence items are clearly identified (legal, regulatory, accounting and *maybe* additional personal references)
  • I think you have to get to know each other as people at a deep level too before you get that term-sheet out.

In other words, unless you committed perjury in front of a Senate Committee or did not declare that you really are a secret double agent employed by a nefarious foreign power, the deal should close. Just do the work upfront.

Is it real? Up to you to find out.

As the founder of the company (here your existing investors can be very helpful in sussing this out), it’s important that you ask all the right questions before accepting to sign a term-sheet:

  • Have you done all the work you need to do ?
  • Is the partnership behind this / are you done on partnership approval?
  • What, if anything, are the open items that separate us from closing?

Your board, when it considers your funding avenues, should carefully consider how baked the options are. If you feel there is too much risk left in a term-sheet, ask the incoming VC to do more work and clear the path to closing. You’re doing the right thing by your company, and they should get that (and respect you for it).

Keep your options open

The reality is that unless you are a fundraising guru, you won’t get all the offers at the same time, so play the game. VC’s are really good at “closing”, i.e. getting you to take their offer. In turn, it’s perfectly fair game to keep multiple conversations going until you are ready to commit.

After all, the worst that can happen to the venture capitalist is that they lose a deal. You? You could lose your company.

PS : A Mea Culpa

Once upon a time, I guess over a decade ago now, I signed a term-sheet too early and never completed. Gael Duval, I am sorry for doing this to you. Thank you for being a great man and accepting my apology. I screwed up that day.

This article was written by Fred Destin, top VC and part of TMRW's board of advisors. It was originally published on his Medium page.

Posted on:

December 11, 2019