I'm wrapping up a term sheet with a US VC for a deal with are both looking at. I've been surprised at a few things that see a bit, well, not so cool side. At the risk of every US VC never working with me again, I'll offer up some observations on some of this stuff.
What is this notion that a start up pays expenses even if the deal doesn't close? I think this is unfair, don't ask for that, and don't expect anybody to give on that. Seems to me if all of the white hot start ups out there who are getting multiple term sheets in a bidding war will take a step back and say no, this "its normal" excuse will start to fade.
90 days of exclusivity:
Dharmesh Shah had a great post on this process taking so long. One reason in my view is people let stuff like 90 days of exclusivity become "normal." In my personal opinion, 45 days is pressing it and is all I'd expect to get. 90 days seems unfair. One alternative is to get the VC to buy the exclusive. Offer the 45 days and charge a non-refundable $1,000 a day for every additional day up to a max of 90. At least you get the light/rent paid for. Yes, I know, not likely to happen.
Founder Buy Back:
This is where if the founders quit, get fired with or without cause, the company (or in two cases I've seen the investors) have the right to buy the founder's shares for nominal value, usually less than what the investor valued the company at. This right decreases over time, usually 2 ~ 3 years, on a monthly basis. The investor side of the story goes this is a way to lower the value of the company if the guy(s) we bet on walks and/or can't do the job. The start up gal says, hmmm, the ink is dry, you fire me for no cause, pay me six months and basically buy my shares for some discounted price. Sign me up... NOT.
My view on this is a bit convoluted. I think if you walk out the door after telling me this is the greatest thing in the world, you need to hurt. I bet on you, ma'am, so you need to feel some pain. On the other hand, having the right to toss you on whim is unfair without me taking some pain. What I think is fair is that if you get fired for (well defined) cause, this buy back should have some teeth/rights. If we get up on the wrong side of the term sheet and toss you for no reason at all, this clause simply shouldn't apply. It's not fair and if the investors decide you ain't it, fine, but fair is fair. You steal, lie, cheat, grossly under perform, etc; we make a cause case; buh bye. You don't have the "CEO mojo to take it to the next level" nonsense, screw em, you get to keep your stuff. On change of control this, of course, goes away immediately, etc.
These are the three big ones that have popped up recently.
Next up the last 50 presentations, no harm/foul meetings and some common themes.