The Term Sheet Mating Dance

Editor’s note: William Hsu is co-founder and managing partner of Mucker Capital and MuckerLab.

There is no word more sacred and yet over-used than “term sheet” in the entrepreneurial circle. The pursuit of the mythical VC term sheet has blinded entrepreneurs from the real goal of building a business: revenue, customers, users, engagement and retention. Securing a term sheet is about more than money — more than survival. It’s validation. It’s the exact moment when the entrepreneur, the beggar, turns into the auctioneer of precious equity. It is, in the immortal words of Mark Zuckerberg, when a struggling entrepreneur gets to turn the table and declare to the world, “I’m the CEO, bitch.”

It turns out there is a big difference between the technical “terms” of a term sheet and the complicated dance of actually receiving/procuring/pillaring a term sheet. From what I’ve learned over the years as an entrepreneur and now as a VC, the mating dance of term sheets can be put into a few genotypes.

The Case Study

If they actually teach in business school how this game is supposed to work, they would tell you that the scenario goes something like this: You have a catch-up with your favorite VC at a coffee shop. You get invited to meet a partner, then it becomes more than one partner in the next three to four meetings, all still casual and friendly. The lead partner makes a call to confirm mutual interest.

Then there’s an early Monday morning presentation in front of all the partners and voilà! You receive a “clean” term sheet in the inbox just slightly below the expected valuation within 24 hours. A couple more calls are made to increase the valuation 20 percent. There’s a handshake and you sign on the dotted line another 24 hours later. Unfortunately only a small percentage of transactions actually fit this mold.

 The Carlito’s Way

VCs, like teenagers, do not want it widely known that they got rejected by the hot girl/guy entrepreneur at school. Nothing is worse than writing a term sheet and having an entrepreneur “shop” the offer to another firm he or she would rather work with … and then having the girl/guy entrepreneur blather about it to all their friends. Why put yourself out there with a printed term sheet that can be framed and memorialized as a permanent record of having been “passed” by an entrepreneur?

Instead, many VCs do everything they can to make sure no trace of having made an actual offer exists. (Snapchats for term sheets?) Some will write a term sheet but only deliver it by hand.  They show up to the company’s office as a team – usually at least five people deep – from an associate up to the main partner (aka the one who blogs), and just for effect, some random famous guy (it’s MC Hammer!) to create some shock and awe. They will not leave until the founder signs their term sheet. At the end of the stalemate, they will walk away and take the unsigned term sheet with them. Without the actual piece of paper, no one could ever prove it ever happened – at least so they think.

The DTR (“Define The Relationship”)

Some VCs like to just flirt. I’m never sure if it’s because they are afraid of straight-out rejection or they like to play the field. Either way, it’s a never-ending cycle of meetings, catch-ups, lunches, coffees, and even drinks … but at no point can you actually nail down whether he or she is actually planning to write a term sheet or simply enjoying your company. Sometimes the term sheet might actually be “on the way” but always needing another “catch-up” before appearing out of thin air. Is this actually considered “getting a term sheet?” I don’t know. Maybe it’s the VC version of the friend zone.

The Call Me Maybe

This one starts out exactly like the case study. Everything goes according to plan. “We are definitely interested/excited/committed to working together,” is muttered constantly by everyone on the deal team. Except that some junior “partner” is making the last round of customer reference checks or finishing up a cohort retention analysis. Some agreement has already been reached around valuation, e.g. “mid teens” or “high forties.” A promise is made that a term sheet will be coming after the weekend, except when Monday comes, no term sheet, just a voicemail to call the lead partner back.

The Pre-Emptive

Some deals are just hot. The word has already spread that the entrepreneur has multiple term sheets; in fact two partners at Sequoia are fighting to lead the deal. Even though it’s only coffee, the VC shows up with a term sheet in hand and is already negotiating against himself/herself before hesitantly handing it over to the entrepreneur – afraid of insulting the entrepreneur. There is no shame in begging – sometimes being direct is the only strategy left. Entrepreneurs do it all the time; VCs know how it works, too. For the entrepreneur, it’s good to be king.

The Blank Check

The entrepreneur has such a great business model and execution that she actually doesn’t need capital. The entrepreneur rarely talks to VCs. In fact, she completely ignores all LinkedIn requests from anyone with “venture” or “capital” on his LinkedIn profile. If a VC gets frustrated enough, he might actually write the “ad-lib” version of a term sheet — basically a term sheet with blanks for key things like valuation, essentially telling the entrepreneur that she can decide the terms of the engagement. I’ve only heard of this a couple of times in the last three years I’ve been investing. I hope to witness it one day or maybe even try it out myself.

I understand the gripe entrepreneurs have about this complicated mating dance. I don’t blame them. Not when the fundraising process continues to be a black box. Not when high school dating rules of engagement seem more decipherable than getting money from a VC. Not when there is only a tenuous connection between fundraising success and real customer satisfaction, retention, and engagement especially at the early stages. Not when hype and blog posts have as much correlation on valuation as revenue.

Do I blame the VCs for creating this song and dance? Not really. If investing were a science, then we wouldn’t need to second-guess ourselves or rely on others to give us additional data points. If we could project the 10-year future of a company with today’s numbers, we would be able to hang out at Bucks and just gossip every other day. In the end, we are players in this game just like the entrepreneurs. In the immortal words of Ice-T, “don’t hate the player, hate the game.”