Presenting a Term Sheet

There has been some interesting discussion about term sheets recently, based on Chris Dixon’s post and Fred’s post, which some people correctly inferred related to foursquare.  One aspect that was not covered in Fred’s post was how we like to present term sheets.

At Union Square Ventures, we like to send term sheets without a no shop and without a “sign by 5pm on ___”.   We also send them as Word documents and without a signature.  All of these are expressions of how we approach the relationship with the entrepreneur(s).

We try to craft a term sheet that is balanced – giving the team as much freedom as possible, while protecting crucial investor interests.  What we send is something that we feel can be signed with minimal negotiation.  But we expect that there will be some back and forth.  Sending a signed PDF therefore seems presumptuous.  An unsigned Word document is supposed to convey that we fully expect there will be a few changes.

We don’t make the term sheet an exploding offer.  We deal with a fair number of first time entrepreneurs.  We want them to feel comfortable that they have the time to figure things out rather than being rushed into an agreement.  It wouldn’t seem a particular good start to a longterm relationship to force people to make up their minds over night.

Maybe the most surprising element for some is that we don’t include a no shop provision.  Our view is that if someone is interested strictly in the best deal possible they will generate bidding whether or not there is a no shop (after all, the no shop only takes effect once the term sheet is signed).  This is not to say that we think entrepreneurs should accept terms or valuation simply because we propose them, but rather that we look for ones that have a bona-fide interest in working with us.  If that is the case they will engage in an open discussion rather than shopping the term sheet.

Our approach has become increasingly open over the years.  As Fred describes, this can sometimes be trying, but we have been very happy with the end results.  We have found that it enables a cooperative relationship from the get go.