Margaret

http://businesseshome.net

1) There is nothing that will give an entrepreneur more leverage in connection with any deal negotiation than a competitive environment (or the perception of same). Indeed, every investment banker worth his salt understands this simple proposition. Not only does competition validate the other parties' interest, but also it appeals to the human nature of the individuals involved. Competitors can be played-off of each other and, as a result, the entrepreneur will be able to strike the best possible deal. As you point out, however, this strategy must be played very carefully and is better-handled by someone with strong experience.

2) As noted in the comments, an entrepreneur should NEVER sign a term sheet (or indeed any piece of paper) prior to its review by an experienced attorney. Yes, it is imperative that entrepreneurs understand all of the terms and provisions of the term sheet (and become an “expert”); however, the term sheet still must be vetted by an experienced attorney to ensure that the entrepreneur is protected (and hasn’t missed anything). This may sound a bit self-serving — but entrepreneurs trying to play lawyer (particularly with all the forms on the web) is probably the number mistake that I see on regular basis.

Thank you – and keep up the good work. (Btw, I’m launching a new site and a blog next week to help entrepreneurs from the legal side.)

Scott Edward Walker
Walker Corporate Law Group, PLLC

Here's another question I'd love to hear your advice on:
Say you got two term sheets, and would like to see both parties invest. What's the best approach on facilitating that?

@cdixon like it or not, most of the people who read your blog are much earlier in their career than you are. starting “a competitive process going without getting multiple term sheets” is a very advanced maneuver. most of the folks consuming your (generally awesome) advice need tactics they can actually employ. it's cool to bring up Master Class tactics, but please consider putting a Don't Try This at Home or Professional Driver on a Closed Course warning on them when you do.

entrepreneurs and other human beings:

1. always always always always always have an attorney review a term sheet before skigning or even responding

2. never never never never sign any legal document (or quasi legal document) with an attorneys counsel

I think what you're saying is there is a big difference between getting multiple term sheeets (verbal or written) and shopping them. Shopping them is the rub – if you're sharing details and offering your equity up like an auction process – it insults the value-add being offered by the investor and violates a confidentiality that is at least implied and probably in the terms. In the process you get at least a bit muddy.

I woder what the other investors think – 'opportunity to trump a competitor' or 'this isnt someone I want run with'…

As a health indicator of the VC market though one could see this as a problem. It is pretty clear that all else equal this protocol strengthens the hand of the VC and weakens the hand of the entrepreneur. Indeed, a VC is not “just money” but one could argue that the entrepreneur should get to decide how to trade off the various aspects of the value that the VC brings without artificial constraints on information flow. This is the age of the Internet after all.

I might have gone overboard the way I stated that.

How about – become an expert yourself and have your lawyer review it. The problem if you don't understand term sheets well yourself is you won't know when the lawyer is being nit picky and when they talking about important stuff.

I think it's perfectly fine if the founder/entrepreneur reviews the document with a lawyer before signing it. i actually recommend it.

this is how we like to operate at spark and in the vast majority of cases we didn't send out a term sheet until there was a verbal agreement.

there have been exceptions of course but this is how we like to do it.