If you follow either happenings in Homer, Alaska or blogging VCs, you’ve seen Brad Feld’s posts on term sheets and various clauses. His advice is pretty good (as are the pictures of Alaska), well worth reading.
The latest post is on the “no shop” clause which talks about the company not chasing other financial opportunities for a set period of time. The theory is that the VC is going to work hard to close the deal so the company should stop chasing other money and work with the VC to close.
Tom Evslin has written a response where he disagrees with Brad’s view on “serial monogamy” preferring to think of this clause as more “unilateral monogamy.”
Tom’s view is that VCs get to keep looking at/for investments which can include competitors to a company that is now locked up and prevented from looking for alternative investment options. His suggestion is that the company make it mutual, i.e. the term sheet has you not looking for alternatives to money for a set period of time during which I don’t look/engage with your competition during that same period of time. Same sauce on gander and goose, or some such saying, read Tom.
I don’t have the depth of entrepreneur experience of Tom nor the years of VC voodoo of Brad. Armed with that disclaimer, here are my observations.
Tom made the point that humans can’t just erase information out of the brain so it is all but impossible for me to look at company A which competes with company B and not mix information even if I never say anything to either company.
At JLA, we try to go as far down the diligence road as possible before actually presenting a term sheet so this becomes a non-issue for me. Once we pick the horse, so to speak, we ride and I suspect that we’d be okay in general with doing the mutual love thing Tom suggests.
We try to stay away from the annoying (and unprofessional) habit of dropping a term sheet, early, on somebody to buy the time for Due Diligence and locking the entrepreneur out of looking for other financing. This whole notion of getting hot, fling out a term sheet, then cooling off but taking the opportunity off the market is just bad business. I’ve said this before: Beware of the one meeting, here’s a term sheet, VC. Yes, love at first sight happens, but……
One entrepreneur actually was pretty good in being pro active with this issues. She came into our office and, after the pitch, asked us if we were looking at others in the space. We said yup. Rather then asking who, she simply said what do I need to do to convince you I’m the best assuming you believe in the space. It was great and I’m working with her over the others.
The suggestion of starting your fund raising early applies here. Just as banks love loaning money to people who don’t need it, VCs love companies that are not on the last 60 days of cash. Yes, the dirty little secret is a VC is in a much better negotiating position if the company is running of cash but that’s a short term thing. Hammering a company, winning ‘harsh’ terms doesn’t exactly set the tone for a good go forward relationship in my view. Do everybody a favor and plan your funding out a bit.
So, on the clause, here’s my view.
You will see it, probably, a term sheet from us. Hopefully, we will have done enough work before that term sheet is given to you whereby both of us are interested in getting the deal closed within 30 days or so. If I were you and legals hadn’t been started after 30 full days, I’d think twice about extending the exclusivity.
If you ask for the Evslin mutual love clause, I’ll probably do it or (which is good for you) ask for more due diligence information, references, etc, to make sure that post term sheet, my work is on contracts, reviewing board minutes, credit checks, etc. Then, armed with the extra information, I’ll probably do it.
When I’m doing legals, I’m in and I am not looking to invest in your direct competition. In other words, I want the term sheet to signal to you we are in barring gross stuff like accounting fraud, criminal records, etc, etc. Post term sheet is not the time, in my opinion, to decide if the space has a market opportunity, etc, etc. That type of due diligence should be done before you get a term sheet.
Finally, over the years I’ve been doing this VC gig, I’ve had one thing proven over and over again: It’s people and it is the handshake that happens before the paperwork starts flying. Matt Dunn, (CEO of Predixis), Butch Langlois, (CEO of Truition), and Vince Mifsud (CEO of GenesisTP) are three, off the top of my head not ignoring others, examples of guys that I work with every day. They started with a “let’s do this” handshake and that handshake drove everything else.
Get the handshake clause first and the rest will work out.