Venture Deals, 3rd Edition

CHAPTER 15 Why Do Term Sheets Even Exist?

One question that we often get is “why does the term sheet even exist?” In fact, why do we need all of this legal paperwork in the first place? Since a careful reader will point out that we have said that it is rare a venture capitalist (VC) would sue one of its portfolio companies on reps and warranties, why can’t we do all of this with a handshake or a simple document? Given that there are only a few things that really matter, why have all of this ponderous structure and legalese?

It turns out nothing requires that you use a term sheet. Our favorite negotiations with entrepreneurs have been ones where we’ve literally shaken hands and agreed on valuation, board structure, and option pool size verbally or over email. From there, we just used our standard forms that we publish on the Foundry Group website (http://foundrygroup.com/resources) and were done with the deal in a few weeks. We find this spirit of collaboration and trust attractive as it starts the working relationship off on the right foot. The irony that we prefer doing deals without a term sheet is not lost on us.

While this approach works if you are a sophisticated founder, have worked with us before, or are working with attorneys who know us well, this is the exception case. Usually, the term sheet will be the first real negotiated document in a relationship.

Regardless of whether a term sheet is drafted or not, a plethora of legal documents will need to be created. This ...