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I was just talking to a friend about a start up that received an exploding term sheet, so I thought I would share a few thoughts. Thread.
I have not been a VC for 20 years, but my impression is that exploding term sheets used to be the norm. The inefficiency of the marketplace allowed VCs to extend term sheets under tight deadlines ensuring limited ability to get another offer or a better deal. 1/
Then I would guess about 10 years ago some of the better VCs started to market their more founder friendly approach by not including expiration provisions in their term sheet. Many investors stopped using expiration dates (I have never used it in a term sheet). 2/
It is very interesting to observe that it seems the pendulum has swung in the other direction where most firms (reputable or not) have reverted to using exploding term sheets. I see it all the time. Why is this happening? 3/
I think venture has become very competitive and efficient and VCs are trying to mitigate the increased competition with exploding term sheets. Part of it is actually quite rational. Everybody is busy and if they are going to do the work and get to a term sheet, ...4/
...it is not worth the effort if the founder can then go and collect another 5 term sheets. Obviously the increased competition and capital that has gone into venture has been great news for founders and great for startups. But, these exploding term sheets can be scary. 5/
Taking a term sheet from the wrong investor bc of pressure can be devastating. So, this trend further emphasizes the importance of building relationships with VCs prior to a fundraise. This is contra to the advice many founders get, which is don& #39;t waste your time talkin to VCs 6/
I think at the growth stage, when a founder is looking mostly for capital, this is probably not a problem. But, at the Series A/B +/- getting to know your lead investor seems incredibly important. Trust is the #1 factor in this decision. 7/
Net, net, exploding term sheets are becoming widely used in early stage venture. So, doing your homework in advance becomes extremely important. Expect it and manage your process accordingly. Oh, also don& #39;t take shortcuts on references. It may buy you some time too :) End/
