Thank you to Muhammad Baig for creating these notes. To contribute to the TWiST PodNotes archive email us.
Episode Date: November 24, 2020
https://youtu.be/twWWa68hbos?t=4
- A term sheet is a document that states the terms on which an investor is willing to invest.
- The valuation
- The specific rights they want out of the transaction
- If they want a board seat
- How much money they're investing
- The purpose is to focus on whether the founder and investors are in the same place and can come to an agreement.
- If someone is originating a term sheet, it means they have a high intent to be involved. This is because preparing a term sheet has legal costs, a time cost, and a reputation cost. The reputation cost is high.
- Due diligence is conducted before and after a term sheet is sent to a founder.
- Before the term sheet is sent: Investors do business diligence and make sure they are comfortable with the material pieces of the business, like how it works and what the business model is. If they decide they want to invest, they put a term sheet in place.
- After the term sheet is sent: Investors bring in their lawyers to do legal diligence, which is totally different than the business diligence side. It's possible that once they get into legal diligence, they find some huge issue. They may then decide to back out of the deal, and that is perfectly acceptable because they uncovered something they didn't know that is fundamental to the investment decision they are making.
Deal busting stuff happens (to me) 1 every 75. - Jason
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In the $1 million to $3 million term sheet range, how often does a deal killer happen?
Maybe I see 1 every 5 years. - Becki DeGraw
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Fraud
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A huge lawsuit. If you have a lawsuit and you have a good defense behind it, tell the investors upfront, before the term sheet. Don't make it look like you're hiding it otherwise you will look like a fraud.
- Two broad categories: economics and control.