Venture Capital – The Next Steps After The Meeting

If the venture capitalists are interested, they will very quickly come up with a draft term sheet for you which gives an overview of the conditions under which they would make an investment in your company. (see next page for a sample term sheet)

They provide a draft term sheet so that they can get an understanding of what the deal could look like and ensure that there is not a disconnect between you and them on valuation, methodology or type of financing.

The draft term sheet is not a commitment on the part of the venture capitalist. It is not a legally binding agreement. It is a proposed framework under which the venture capitalist is prepared to do business. The most important element of the draft term sheet is the valuation. If you are too far apart on valuation the deal will not go any further.

The due diligence process is not a 24 or 48 hour process, it is quite time consuming. In order to save time the draft term sheet is put forward to ensure that a negotiable transaction can be reached before investing further effort.

There are also considerable up front fees that the entrepreneur will have to pay. Among these are the venture capitalist’s legal fees. Some venture capital firms will also require a $20,000 to $30,000 non-refundable payment up front before going forward.

The time period given to accept or reject the draft term sheet is not very long. You will have to commit to it or drop it fairly quickly.

Venture Capital – What The Venture Capitalist Due Diligence Process Looks Like

The venture capitalist due diligence process is intense and can take weeks or months depending on the complexity of your company. It will be the most intensive look at your company that you have ever experienced.

The venture capitalists will want to know everything from your standard articles of incorporation, directors, and shareholder agreements up to the details of how your business processes are run.

Venture Capital – How Long The Due Diligence Process Takes

The due diligence process will very rarely last one or two weeks.

Remember that the venture capitalist is also working on other transactions beyond your company.

The due diligence will typically last at least one month. If there are any complex issues such as environmental approvals that have not yet been met, further delays are likely.

When you are considering raising capital, make sure to get all your company records and documentation together in advance. You do not want to wait until you get a draft term sheet before trying to find important documents that the venture capitalist will need to move forward.

More and more venture capitalists are also worrying about environmental assessments. You may consider getting your company and property assessed before approaching an investor.

The venture capitalists will also want to speak with your clients, suppliers and bankers to get an understanding of how your company is regarded by the outsiders who deal with you on a daily basis.

The purpose of the initial meeting and draft term sheet is to get an approval in principle. From there the venture capitalist will carefully examine the details of your company before making an official offer.

An intermediary can be helpful in speeding up the process, especially when dealing with the lawyers on both sides. The intermediary is responsible for “cracking the whip” and ensuring the process is progressing. The faster you can make lawyers work, the lower your bill will be. Generally, if you give lawyers enough time, they will make sure to use it and bill you accordingly.

Venture Capital – What Happens After The Due Diligence Process

If the venture capitalists are interested in your company after completing their due diligence, they will offer a binding term sheet. It will reflect the draft term sheet that has already been agreed to but this one will be a legal contractual agreement. Then the real negotiations start.

There are different types of financing to consider: debt, equity, and mezzanine.

Debt financing is the most objective and is therefore the easiest to negotiate. If you have the assets to support the debt and the income to support the interest payments, the negotiation period will be very short.

Equity financing negotiating is more complicated and revolves around agreeing on valuation and percentage ownership. Discussions usually requires several days.

Mezzanine financing involves a mix of equity, debt, convertible debentures and preferred shares. Negotiating the technical aspects of each so that an agreement can be reached between the investor and your company can be time consuming.

Another dictating factor is the number and variety of financing offers that you receive. It is the intermediary’s role to help you bring more than one offer to the table and assist you in evaluating and negotiating which one is best suited to your company’s needs based on their previous experience.

Venture capital term sheets are time limited. You have to quickly make up your mind if you want to accept or reject the offer. The short time period is in place to prevent you from using one term sheet to solicit new offers from other venture capitalists.

Evan Carmichael