Comments on: Backing out of a term sheet

By: Which venture firm/partner is Chris Dixon talking about in his post on "backing out of a term sheet"? - Quora

Sun, 19 Sep 2010 08:14:35 +0000

[...] in his post on "backing out of a term sheet"?Happy to get an answer even if anonymous.http://cdixon.org/2010/02/03/bac…1 Commenton a side note, chris dixon is on a roll with his recent posts. he's making me want to [...]

By: Being an entrepreneur | SocialStartups.com

Being an entrepreneur | SocialStartups.com — Fri, 12 Feb 2010 15:15:14 +0000

[...] weeks, we agree to a price and terms, and then he pulls out. From what Chris Dixon writes, this is more common than it should be. In the end, though, I think it was the best thing that could have happened to [...]

By: Backing out of a term sheet | Igniting Startups - nPost

Backing out of a term sheet | Igniting Startups - nPost — Thu, 11 Feb 2010 16:52:28 +0000

[...] From cdixon.org [...]

By: Shared Items – February 6, 2010 | Oliver Roup's Blog

Shared Items – February 6, 2010 | Oliver Roup's Blog — Sat, 06 Feb 2010 06:02:01 +0000

[...] Backing out of a term sheet cdixon.org – chris dixon's blog [...]

By: David Frankel

David Frankel — Fri, 05 Feb 2010 21:51:06 +0000

I was directly involved in this situation for Founder Collective and should have commented earlier. Mea culpa: I was at fault for allowing a portfolio company to commit to a process which we understood was not inexorably going to culminate in a deal. In the spirit of Chris's blog, I think the key learning for BOTH VC's and entrepreneurs is not to commit to term sheets before being 100% clear on both sides that you want to move the ball forward and only misrepresentations etc can get in the way of the deal culminating. In over 30 deals, I haven't put out a term sheet which I did not 100% expect to close. I think that the VC involved here has been reflective on this process and our philosophy of what a term sheet should represent and genuinely cares about what happened. My hope is that Chris's original blog post keeps the focus on the issue (his MO is 100% protect the entrepreneur). In retrospect, I should have been much more forceful in talking down the entrepreneur from a seductive situation.

By: vbd

vbd — Fri, 05 Feb 2010 14:37:19 +0000

As a public blogger I wouldn't name the VC firm as it can get you into lots of potential legal problems. But, definitely talk about it with friends and collegues and hopefully the public will find out from innocent sources! Tee hee!

Thing is ... the majority of VC's do need to get a taste of their own medicine not once but daily. Anything to stick it to the bad VC's is not only a good thing but essential.

"Power to the Entrepreuners" (that's what John Lennon would have said).

By: Siminoff

Siminoff — Fri, 05 Feb 2010 02:21:26 +0000

Next time when you are with Josh ask him about the Grid deal that I was involved in. If you find the above bad the Grid deal will make you cry, VC's backing out after the wire date, after I had been personally bridging the company...

Some VC's do not care about their reputation, sadly for me the one who screwed me is one of the top VC's in the country and was able to totally get away with it.

I do hope your thesis is correct I always tell people (when I am with them in person) the full story, which who knows maybe it has cost them some deals, I can only hope.

By: petekazanjy

petekazanjy — Thu, 04 Feb 2010 21:10:40 +0000

Well, that sort of behavior is also bad, and should float as well, don't you think? Badly behaved entrepreneurs pee in the pool everyone has to swim in. Better to discourage that behavior.

By: chris dixon

chris dixon — Thu, 04 Feb 2010 20:13:38 +0000

U should email me the name of the firm.

By: Chris

Chris — Thu, 04 Feb 2010 20:09:25 +0000

Rock on Chris! Thank you for remembering where you came from and sticking up for the next generation. You're an inspiration to us all.

By: startupper

startupper — Thu, 04 Feb 2010 19:58:10 +0000

Chris – great post. I just had a VC pull out of a signed term sheet in the 11th hour for what seemed to be no reason other than suddenly being “luke warm” on the space. Not only did they pull out of the deal last minute, but they left my start-up to pay the entire legal bill. Completely unprofessional. I think the lesson learned is that in this market, no deal is really “done” until the wire transfer hits your bank account and entrepreneurs need to be cautious to cover themselves at all steps in the process.

By: chrissheehan

chrissheehan — Thu, 04 Feb 2010 16:04:21 +0000

I've seen it happen both in VC and private equity; fairly rare in VC circles though. Chris

By: jerrycolonna

jerrycolonna — Thu, 04 Feb 2010 15:52:49 +0000

“Entrepreneurs should be wary when a VC puts up a term sheet quickly without doing their work” Exactly so, Brian.

By: jerrycolonna

jerrycolonna — Thu, 04 Feb 2010 15:52:07 +0000

Definitely not crazy, Chris.

By: ancornwell

ancornwell — Thu, 04 Feb 2010 13:05:36 +0000

Hopefully the VC is blacklisted somehow, but why would a “well known” person risk their reputation? There is probably a good reason. Hopefully the VC who picks up the project doesn't stumble upon the problem (if it exists) too late.

By: Anonymous

Anonymous — Thu, 04 Feb 2010 10:33:01 +0000

Why not? There are many more people who need to know than the people in your circle. All the other investors would know about it so why not the other entrepreneurs.
If you don't feel comfortable to blog their name why not leave it as an anonymous comment on this post.
Anon says: I'm guessing the company is X.

By: brianhirsch

brianhirsch — Thu, 04 Feb 2010 08:57:10 +0000

Chris,

Can't agree more it's bad form to walk away from a term sheet for basically no reason. At Greenhill SAVP we will only walk away under a couple of circumstances which has happened twice in 10+ years:

- fraud or a substantial issue with a management background check
- blatant misrepresentation of facts discovered during post-term sheet confirmatory due diligence

You are correct - it's bad karma and just wrong to back out under other circumstances.

Despite this fact I think there are a number of VC funds that do back out post-term sheet. In my experience this happens most ofteh when a deal is "hot" and the VC fund puts in a preemptive term sheet before they've done adequate due diligence to lock-in the deal so they don't lose it. Entrepreneurs should be wary when a VC puts up a term sheet quickly without doing their work beforehand.

Brian

By: Chris Waldron

Chris Waldron — Thu, 04 Feb 2010 07:43:12 +0000

Bad move on the part of a VC. As a new guy on the block I read blog's like yours to learn about the tech space and quickly can see what type of individuals I would want to do business with and which ones look like a recent episode from Jersey Shore.

Thanks for all that you do.

By: chris dixon

chris dixon — Thu, 04 Feb 2010 07:08:18 +0000

Thanks, Jerry. Nice to hear that I'm not crazy and more experienced VCs agree.

By: ArticleSave :: Uncategorized :: How Your Term Sheet Affects Your Reputation

ArticleSave :: Uncategorized :: How Your Term Sheet Affects Your Reputation — Thu, 04 Feb 2010 07:04:05 +0000

[...] a recent blog post Dixon explains the unfortunate circumstance of one of his portfolio companies. Says Dixon, [...]

By: AndreaF

AndreaF — Thu, 04 Feb 2010 04:17:08 +0000

Thanks for posting more often lately, Chris. Your insight is really valuable.

By: Aviah Laor

Aviah Laor — Thu, 04 Feb 2010 03:56:23 +0000

so they due dil two competitors in about the same time…

By: jerrycolonna

jerrycolonna — Thu, 04 Feb 2010 02:40:51 +0000

I've never seen this happen from a well-established VC firm. It's nuts. (I've seen it a few times with “strategic”–i.e., corporate investors and smallish firms.)

By: links for 2010-02-03 « Blarney Fellow

links for 2010-02-03 « Blarney Fellow — Thu, 04 Feb 2010 01:31:47 +0000

[...] Backing out of a term sheet cdixon.org – chris dixon's blog (tags: vc legal startup brezmejnik) [...]

By: royrod

royrod — Thu, 04 Feb 2010 01:16:06 +0000

That's bad, and surprising the firm's partners didn't step in to salvage their reputation. Tho it's not as bad as a tier 1 vc literally threatening a company that they would pull the term sheet and black mark the company if the entrepreneur didn't accept it immediately. Like you I can't name names in public

By: ErikSchwartz

ErikSchwartz — Thu, 04 Feb 2010 01:15:20 +0000

Sure investors share information, but they don't do it on public blogs.

By: Scott Edward Walker

Scott Edward Walker — Thu, 04 Feb 2010 01:09:59 +0000

Agreed – thanks Chris

By: chris dixon

chris dixon — Thu, 04 Feb 2010 01:06:55 +0000

Thanks Scott. My sense is the company should almost always just move on and get caught up suing etc. Agree with (4) but it's hard because at that point the co has told the other investors they are turning them down.

By: Scott Edward Walker

Scott Edward Walker — Thu, 04 Feb 2010 01:06:47 +0000

Thanks. I understand that break-up fees aren't customary; however, as I learned doing billion-dollar M&A deals, if you have strong leverage (or the perception of same), you can push for terms outside the box.

By: paulhlee316

paulhlee316 — Thu, 04 Feb 2010 00:57:54 +0000

Scott,

The only issue with your suggestions would be that very few vc's would sign off on a "break-up" fee for an early stage company. Also, in terms of keeping other investors warm, the backing off a term sheet from the initial vc would likely raise several red flags and sabotage those efforts.

We were involved in a situation where a very well known east coast VC signed a lead term sheet (we were ready to follow as a strategic investor) and then they backed out (the reason they gave was that they didn't want to commit new capital until their newest fund was fully raised - they had a partial closing). Our diligence didn't unearth anything alarming.

To Chris' point though, very bad form for the vc to back out (and even worse to not give the real reason).

By: Scott Edward Walker

Scott Edward Walker — Thu, 04 Feb 2010 00:42:27 +0000

Hey Chris – great post. A few quick points from the legal side: (1) Unless the term sheet expressly provides otherwise, there is an implicit requirement for the parties to negotiate in good faith. Accordingly, there may be a valid claim against the VC (see, e.g., http://bit.ly/6RjZrF). (2) Some Courts have found that the conduct/actions of the parties post-signing have created a binding agreement, despite express language in the term sheet to the contrary. (3) It is prudent to try to include a “break-up” fee (e.g., reimbursement of legal) to deal with issues like this. (4) Sellers/Startups should try to keep other buyers/investors “warm” and the exclusivity period short (e.g., 30 days) to anticipate issues like this. Many thanks, Scott (@ScottEdWalker)

By: Jay Levy

Jay Levy — Thu, 04 Feb 2010 00:40:56 +0000

that blows. and really hurts us all. our motto “a quick no is the second best answer we can give”

By: henryalbrecht

henryalbrecht — Thu, 04 Feb 2010 00:40:56 +0000

You WILL be grateful. The VC will move on with their gold.
This happened to us, and we'll probably never know why. (I am inclined not to believe the kind words they told us — very well described by Jordan Cooper's reply: “4) partner issued TS without his whole partnership truly on board…tried to muscle it through but his partners “strongly suggested” he change his mind (sucks for this partner, probably on the outs with the firm anyway),”).
I am glad I had the presence of mind on the phone to say: “I feel much more sorry for you than for us.” (Even as I had to take a HUGE loan to make payroll for a few months). How do I feel about it now, a year later? Well, we are blowing away the milestones we said we would, are kicking much a**, and are SOOO grateful not to have to deal with people we can't trust.

By: chris dixon

chris dixon — Thu, 04 Feb 2010 00:40:39 +0000

Trust me, they'll deeply regret screwing over entrepreneurs.

By: sk

sk — Thu, 04 Feb 2010 00:35:49 +0000

Of course. If VCs depend so heavily on reputation, yet nobody is willing to give them a bad rep for bad behavior then obviously the bad behavior will get more prevalent.

By: chris dixon

chris dixon — Thu, 04 Feb 2010 00:30:03 +0000

Actually even better I've notified a bunch of people to only consider this firm for “stalking horse” purposes. So they can get a little taste of their own medicine.

By: chris dixon

chris dixon — Thu, 04 Feb 2010 00:24:51 +0000

Actually this firm did it at least one other time that I know of recently.

By: Jordan Cooper

Jordan Cooper — Thu, 04 Feb 2010 00:20:05 +0000

yea, not cool…the good news is, your guy will probably still get backed…and better to learn that you almost partnered with someone immoral before signing the deal, as opposed to learning it down the line when the stakes are potentially higher…

By: Jay Levy

Jay Levy — Thu, 04 Feb 2010 00:19:20 +0000

I agree you shouldnt share the name publicly unless the fund has a reputation of this in which case it will get out on sites like the funded.

By: danielharan

danielharan — Thu, 04 Feb 2010 00:19:08 +0000

A large, well-known VC did that to a company I worked for. Everyone in my community knows who they are and if someone asks me for advice about pitching this firm, the answer will be “don't”.

By: Jay Levy

Jay Levy — Thu, 04 Feb 2010 00:18:05 +0000

From our perspective terms sheets are a formality; we discuss the terms we are going to put on paper with the teams prior to even issuing them; if we all can't agree the document is going to help.

Typically once you have gotten a term sheet we have done all the diligence and will try to go to closing as quick as possible. There are several reasons for this, one being that we want the team to focus on the business not fundraising, the other is that the longer it takes the more expensive the legal bill gets.

What would be interesting to understand is the flip side, what about companies backing out of signed term sheets?

By: Elie Seidman

Elie Seidman — Thu, 04 Feb 2010 00:17:42 +0000

Hopefully the market will become more efficient in the coming years.

By: chris dixon

chris dixon — Thu, 04 Feb 2010 00:15:32 +0000

i think 2

By: Jordan Cooper

Jordan Cooper — Thu, 04 Feb 2010 00:11:06 +0000

what do you think happened? my top 5 guesses would be 1) toxic reference (should have done references before signing TS, but i could see rationale), 2) found better deal when studying competitive landscape (complete bullshit), 3) Partner low on cycles, hotter (non competitive) deal came in and he had to choose (complete bullshit), 4) partner issued TS without his whole partnership truly on board…tried to muscle it through but his partners “strongly suggested” he change his mind (sucks for this partner, probably on the outs with the firm anyway), 5) decided they were going to build it themselves and own more equity (complete bullshit).

By: chris dixon

chris dixon — Thu, 04 Feb 2010 00:10:29 +0000

Oh, I'll be sharing it with the people who need to know (e.g. entrepreneurs, seed investors). Just not sure I can blog it. These VCs don't understand how often entrepreneurs go through lists of VCs with “mentors” like me and we decide who to pitch and who to ignore. Just don't get what they are thinking.

By: Elie Seidman

Elie Seidman — Thu, 04 Feb 2010 00:01:53 +0000

Yes. If I felt strongly enough about having been screwed to write a post, I would. Investors share information – not all of it great – about companies informally with some regularity. That information sharing among investors is something that entrepreneurs don't benefit from since we are isolated from each other. I think that the repercussions of VC bad behavior are often talked about but are not often actually felt. The bad guys stay in the business for a very long time because information flows very imperfectly.

By: chris dixon

chris dixon — Wed, 03 Feb 2010 23:56:34 +0000

Would you?

By: Elie Seidman

Elie Seidman — Wed, 03 Feb 2010 23:46:48 +0000

Curious why you are not naming names?

By: stevedc3

stevedc3 — Wed, 03 Feb 2010 23:31:32 +0000

great analogy to later stage private equity (the auto parts firm). other VCs should be humbled by your model of transparency

By: Kevin Spain

Kevin Spain — Wed, 03 Feb 2010 23:27:01 +0000

Agree, Chris, that this is truly bad form.

Unfortunately, firms that do this give themselves — and all other venture investors to a certain extent — a bad reputation.

Fortunately, it's a small community we live in and this type of behavior is certain to bite them in the future.