Getting to a signed term sheet

[Let’s assume that our venture fund] just signed up a term sheet with a new company (Company X).  No need to disclose the company name or industry for purposes of this post.  Rather I want to briefly comment on the process leading up to the term sheet and next steps.

First, the process:

1.  We first engaged with Company X in mid August. It is now mid December.  So our diligence and exploration process took us 4 months.  That is normal for us.

2.  The diligence involved us learning a great deal about Company X’s industry because we have not done a deal in this space previously.  It involved calls with 4 or 5 parties in the space.  It involved a ton of back and forth with Company X’s CEO.  It involved Company X finding a technology lead during our process.  It involved a lot of work by Company X (and by us).

3.  Critically, during the process, we came to trust the CEO and the team.  The CEO was hyper responsive to requests.  He struck the right balance between “salesman” and “information provider”.  This is not always easy.  I loved the fact that the CEO was the person feeding us the answers.  No delegation.  And they were typically good answers.

4.  Also, during the process, we had to clean up the company’s cap table and make sure that we all agreed on who owned what on a pro forma pre-money basis.  Without having a complete pre-money cap table, it is impossible to calculate a share price.  I use the term “pro forma” as often there are equity issues that need to be resolved prior to the deal closing that are NOT currently reflected in the company’s current cap table (like planned grants to advisors, co-founder true ups, etc.).  Sometimes those issues take extra time to resolve.

5.  We presented our first draft of the term sheet to Company X about a week ago.  I told the CEO that I was presenting a basic Series A term sheet with very normal terms.  I called him prior to delivery to point out a few things to purposely draw his attention to them.  No surprises.

6.  He came back with very few comments after reviewing with legal counsel and some of his others advisors.  Perfect.  Fair all around.  The way it should be.

Now for the next steps.  Here is how I outlined them to the CEO:

1.  Line up the balance of the investors.  We are doing $400K out of $1mm, so we need to get commitments from about $600K of additional investors.

2.  Once the $600K is lined up or mostly lined up then I will ask our fund’s lawyers to draft the deal docs and we will engage IP counsel to do an IP review (high level).   It is important to [utilize expensive legal] counsel only after we feel good about the deal closing.

3.  Company X will respond to our “boring” diligence request list items by setting up a file sharing box.   We will then review and get our lawyer’s input on items as necessary.

4.  Get the investment documents all negotiated and close the deal in January.  Hopefully there won’t be much to do on the documents, but there are always issues.

Editor’s Note:  This post was originally created and published by Ithaca VC, which focuses on start-up companies and early stage investment.  The post has been edited for clarity but read the original post.

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