VC Term Sheets

Ben Gilbert (0:00)

David, it is about damn time that we did an episode on Term Sheets.

David Rosenthal (0:05)

I feel like this is like in the life cycle of every person who is a venture capitalist and also either has a blog or a podcast. You eventually, you do the episode or the blog post on Term Sheets.

Ben Gilbert (0:19)

It's like writing a power ballad or something as a rock star. It's like everybody has to try it once.

David Rosenthal (0:26)

It usually doesn't age well.

Ben Gilbert (0:29)

Yeah, it's true. Well, listeners, we should mention we're super excited to be doing this episode because I think if we did 20 LP episodes on different things in the life cycle of starting a company, running a company, getting company funded, and didn't touch on a high level overview of Term Sheets, we would be doing a massive disservice to a hugely important thing to understand in the entrepreneurial journey.

And we should also say that if you are starting a company, and are about to go through a fundraising process, I highly recommend, and I know David does as well, reading Brad Feld and Jason Mendelson's book Venture Deals. It is a Bible on the subject. And I think today we will skim across the top of some of these things and talk about what a Term Sheet is and a lot of the more practical nuances of it. But if you really want to dive into the very, very sophisticated nature of it, couldn't recommend that book more.

David Rosenthal (1:24)

We talked about this a little bit on Slack for those of you who are on Slack. I feel like Slack has been great lately, by the way. So much great conversations. Thank you everyone for participating.

So with the LP shows, I feel like things are going really well.

And we realized it had been a little while since we've had so many great guests on for interviews. It had been a while since we'd done an LP show with just us around a company building topic. So that's what we're doing today. And we're going to try and settle into a cadence of about a third, a third, a third of shows like this that are Ben and I discussing a company building topic, a third interviews with operators at startups and big tech companies, and a third interviews with investors and their perspective. So let us know if you are liking that mix and we'll keep going.

Ben Gilbert (2:15)

Yeah, and we reserve the right to talk about non-company building topics too, because I think, David, we thought this was going to be a little bit more, I think we're starting out. It's like, hey, sometimes we'll just record our phone calls.

We haven't done as much of that, but I think we may do those from time to time and we'll give you a heads up if it's going to be a little less structured like that.

David Rosenthal (2:33)

Well, term sheets.

Ben Gilbert (2:34)

Yeah. So we're going to structure this a little bit, at least the opener, in kind of a Q&A with me to David.

My first question to you, David, is what is a term sheet and what's it for and when's it happen?

David Rosenthal (2:49)

Term sheets are sort of a mythical creature in the venture and startup world. Everybody talks about getting term sheets and it's a pivotal moment, used to refer to lots of things. But a term sheet is specifically, it is a non-binding document.

It is literally what the name says it is. It is a sheet with a set of terms for negotiation on it for a potential investment and it is typically given by a venture capital firm or angel or a group of angels to a company.

Those are the terms at which they are going to offer to invest in the company. Why it's such a big deal is that when a firm does that, when an investor does that, they are saying, yes, I have gotten over the hump, you have flipped from no to yes, I want to invest in your company. And then a negotiation kicks off on what are the terms on which you invest. But just getting to that point is like probably 90%, 95% of the work in terms of raising money. Once you get your first term sheet, then that drives FOMO from other investors who are considering potential investing. They have to make a decision about whether they are also going to get you term sheets. And typically that is what the first one that comes in kind of cascades the process.

Ben Gilbert (4:07)