You’ve spent the last 4 months fundraising and you finally received a term sheet. Congratulations!
Here are four concrete steps you should take to optimize the raise.
- Notify Other Investors
Once you’ve received a term sheet from an investor, we recommend notifying all other investors who are engaged with you ASAP. Two reasons here. The first is that it’s the polite thing to do. Other investors need to understand that the game has now changed and you are that much closer to raising capital. The second is that it will help you understand who else is genuinely interested. You may find one term sheet turns into three if you’ve done a good job engaging prospective investors to this point.
- Understand the Terms
Surround yourself with a smart team of people to help you evaluate the terms and fine print. It’s important you understand all of the conditions in the proposed contract, many of which could have unanticipated long-term consequences. Y Combinator issued a ‘Standard Series A Term Sheet’ with standard and clean terms which is a great starting point to better understand what a “good” term sheet looks like. Generally speaking; a trusted advisor who’s raised capital themselves should help you understand the commercial impact of the term sheet and a lawyer should help you with the legal language.
- Choose Wisely
Consider a VC the same way one would consider a business partner. Every firm is different and each VC has a different approach to a partnership. For example, some are marketplace experts, some have a strong engineering focus and others can help optimize the recruiting process. It’s critical to consider the true wants and needs of you and your company before making a decision. At this stage, confirmatory diligence will begin – think deep dives into your company’s financials, background checks and customer calls. Don’t be afraid to do your own diligence on the VC, ask for references (especially from founders whose businesses may have failed despite an investment). This process typically takes 4-5 weeks, but can be escalated if you agree to work efficiently to a tight schedule.
- Don’t Forget Venture Debt
If you’re considering venture debt, now is the time to take it. Also known as venture lending, venture debt is offered to early stage venture-backed companies who are seeking additional financing products. A bank such as Silicon Valley Bank (SVB) can follow on with venture debt post funding and finance your working capital. The average amount of venture debt from a facility like SVB is 20-25% of the venture capital in the bank. Although this financing option is frequently overlooked opportunity by first time founders, we recommend exploring the option and seeing if it may be a good fit.
Once you’ve gone through this process, the real fun begins. It’s time to cash the check and get working!