Annoying Term Sheet Things

Rick Segal is in the middle of a negotiation and is having some frustration with his co-investor – a “US VC” – around settling on a few terms that he thinks are silly.  I agree with two of them but struggle with the third.

  • Expenses: If the deal doesn’t close, the startup pays.  I agree – that’s silly, especially for an early stage company.  I can imagine some later stage / VC buyout type deals where this might apply, but it doesn’t make sense in an early stage deal.  However, the company should always pay (using their newly raised money) when the deal closes.
  • Exclusivity Term: 90 day exclusivity is too long.  I agree – if you can’t get the deal done in 45 days from the signing of the term sheet, something is wrong.
  • Founder Buy Back: This one isn’t simple – it’s very context specific, personality dependent, and linked to stage, capital structure, roles and responsibilities of the founders, existing and future management team, and a whole bunch of other stuff.  I don’t think there’s a general case here – I think you have to address this deal by deal.

Rick – don’t worry about the “US VCs” – if they are offended by the philosophy of Canadians, just offer to take them to a hockey game.

  • Steve

    Along these lines, what do you think of deals that would have founders’ equity become subject to vesting requirements? What about if the company is 2, 4, 6, 10 years old?

  • It’s very situation specific. In an early stage company, vesting will always apply to founders. The specific terms of the vesting will vary based on when the company was founded and how much progress was made prior to the investment. For example, it’s typical to give founders one year of vesting credit and then vest the balance of their equity over a three or four year period.

    This changes dramatically as companies become older / later stage. In those cases, the vesting really is an element of the dynamic around the terms of the deal.

  • Steve

    That makes sense to me. Thanks for the feedback.

  • I thought the biggest problem these days would between VCs in the US and canada would be which currency to value the company.

  • phil

    What is a typical expense cost?

  • what does the term “founder buyback” refer to? Is this referring to VCs buying out founders stock or to founders buying back issued stock to regain ownership of the venture???

  • @JTreiber: “Founder Buy Back” refers to the company (or the investors) buying back the founders shares.