VC:VC Closing the Deal

Once a VC firm makes a decision to invest in a startup, it provides a termsheet outlining the basic economics of the deal. For an investment of some number of dollars, the investors will end up owning some percentage of the company. Termsheets include a bunch of other terms (you can find links to some of my favorite articles on this stuff here), and can be as short as a page or two, and as long as 20 pages.

Getting to a termsheet which both parties are happy to sign generally involves lots of negotiations because the main terms of the deal are hammered out in this phase. However, a signed termsheet is just the beginning of a process during which lawyers produce three to six inches of paperwork before the money changes hands. This phase of the process (VCs say the deal is "in docs" or "in legal") also produces issues which need negotiating. However, once we are in docs, there is generally enough goodwill and momentum to carry the deal across the finish line.

If a deal does fall apart it is generally because of a major departure from expectations in some way. For example, many signed termsheets from early September 2001 never closed - VCs pulled out after 9/11 and the associated drop in the markets. Other examples are where the legal process finds significant problems in the business (litigation, improper accounting, IP issues) which had not previously been disclosed or well understood. The termsheet is actually a non-binding statement of terms (usually), so it gives both sides an out if they want it badly enough. Sometimes the startup withdraws from the deal. Maybe they get cold feet thinking about the loss of control, or they think they can get better terms. Once in a blue moon they get an offer to be acquired which turns out to be the real thing.

For either side to withdraw from a deal once a termsheet is signed, without a really compelling reason, is pretty bad form, and your reputation soon gets around. It does happen, however, and so we all know that it's never over until it's over - when the money is wired and the share certificates received.

So what does this have to do with Venture Cycling (this is a VC:VC post after all).

First, I bought a bike, and all the equipment (kind of like making the investment before the termsheet). Next, I signed up for the Hazon ride - I signed the termsheet. Finally, this coming weekend I get to close the deal - ride the 120 miles over the two days. Things look good and feel good, but the deal isn't closed yet, so who knows? Will the cold I am nursing get worse? Will I trip over a kids toy and sprain something? Will my bike be hit be a meteor? Will I? These kind of things have derailed venture capital deals, and I suppose they could derail a venture cycling deal as well. However, the goodwill and momentum I have built up seem unstoppable. I plan to close this one.

1 comment:

Ish Hazon said...

Richard

I really enjoyed your post.
But until quite close to the end, I thought you were headed in a different direction. I thought that you were making a different anaology: one about the different levels of engagement between for profits and non-profits. There are, it seems to me, three levels of increased commitment in becoming involved with a non-profit:

a/ doing something and/or making a gift

b/ making an annual commitment to do something or an annual gift

c/ joining a board

d/ becoming chair.

The latter two - joining a board and becoming chair each has similarities, it seems to me, with the VC process. In each case there is an existing relationship or conversation; then there is a much more focused conversation, perhaps over time, addressing issues; and the point of agreement - to join a board, to become a chair is, as the termsheet is, both a culmination and a beginning.

And of course - as with a private sector investment - one hopes that a growing stream of good things will ensue in the future....