Lesson IV: Term-sheets are like prenups…
During my summer working at a Venture Capital fund, I analyzed several investment opportunities. In one of those opportunities we had decided to present a term-sheet and thus I drew a first version of the document. My first term-sheet!
Before starting to draft the term-sheet, I started by analyzing the pitch deck in order to get familiar with the investment opportunity. After reading it, I did not quite believed in the investment. Although I liked the product, there were some issues that I was not comfortable with. Instead of discussing those issues with my colleague (and mentor) Walter Palma, I decided to include several clauses and milestones to mitigate potential risks.
“Do you believe in this deal? Are you willing to support this entrepreneur even if things go south?”. This was Walter Palma’s reaction after reading the term-sheet that I had just drew. Clearly, my answer to both questions was “NO”.
Walter immediately said that we would not do the deal. If we were to invest we would need to be committed to help the entrepreneur in good and in bad moments. Our reputation as an investor would be at stake if we don’t properly support the entrepreneur.
And his words made sense to me…Immediately this analogy come into my mind: Investing in early stage startup is like marrying…term-sheets are like prenups!
Don’t get me wrong, term-sheets are very important to decide investor and entrepreneurs’ payoffs and control. But in an early stage investment, term-sheets only protect you from downside risk. To succeed in early stage investment, you have to focus on the long-run and be committed to support entrepreneurs in good and bad times.
Next time, instead, I will:
- Spend more time dating (without wasting the entrepreneur’s time), in order to get to know the entrepreneur, to understand what motivates the entrepreneur to pursue this opportunity, etc.
- Only “propose” if I am committed and if I share the same vision as the entrepreneur (I don’t want to end up investing in a lifestyle startup)
- Get fast to a yes, by using standard and simple term-sheets (How much time did take you to draw and accepting your prenup?)
Entrepreneurs should be suspicious about a seed investor that does not behave in this way. Most likely he is not very experienced (as I was not).
If you have different or complementary perspective, leave your comments to enrich the post.
Disclaimer: This post is part of a series of posts about my “lessons learned” working at a Venture Capital fund during the summer. My objective with these posts are to put in paper my “lessons learned” and hopefully helping other entrepreneurs. Looking forward for your feedback to complement my “lessons learned”