Comment by j-a-a-p
2 years ago
Hmm, my experience with one of the largest investors in NL was a full verbal 'yes'. The investor was actively involved in the hiring process (that is how I got in). A founder put in his cash (think a small apartment) for a lower single digit percentage of agreed valuation. I signed for something smaller / similar but without bringing in cash.
In reality the money never arrived, they forked in few times 250k. The other investors who bartered a deal all brought in their share. My takeaway is that even the most reputable investor has absolutely no limit in saying yes and doing no.
The motivation for everybody was greed, and that was buzzing around due to the fact a large investor was involved. They know that and they used it. But in the end in this world signed contracts and wire transfers are the only credible thing.
What is NL, the Netherlands?
One of the largest investors in a given location might not be "top-tier" in the overall VC market.
Yes, but it is not a VC. If they would, measured by asset size they would easily fit in the top-10 VCs of the US (United States).
It is not about asset size only but real experience and a portfolio leading rounds.
2 replies →
A signed contract is certainly part of the process. I can't speak to outside the US but here the high-level steps are:
1. Engage the firm and reach a decision that they'd like to invest.
2. Negotiate and sign a term sheet. (The only part of this that's legally binding is that you won't continue shopping around while negotiating the full deal with them. That said, it's extraordinarily uncommon for things to fall apart after signing a term sheet.)
3. Negotiate and sign the full deal. (This goes beyond just a contract, e.g. you'll be amending your articles of incorporation to reflect changes in board composition and a million other things.)
Virtually all breakdowns are in steps 1-2. Maybe the firm doesn't want to invest, or they aren't offering a compelling valuation, or they aren't flexible on dilution, or they only lead and you want another firm to lead, etc.
Keep in mind these are VCs, not PE. VCs make their money from outlier companies, so the competent ones don't optimize for worst-case outcomes. You'll never see a dirty term sheet (e.g. liquidation preference > 1x) from Sequoia, for example, because they don't return 8x on a fund by squeezing pennies out of failed startups.
> But in the end in this world signed contracts and wire transfers are the only credible thing.
I don't have any experience in this business, but why would anyone think otherwise? Did you spend your own money on a verbal promise of investment without any signed document??
That was my reaction, too. I have always avoided VC investment, but "it's not a done deal until the check clears" has applied to literally every deal I've ever done.