Why Exploding Term Sheets Don't Exist in VC
Don't play the fools game
In the world of venture capital and startups, you may hear the term "exploding term sheet." This refers to an investment offer that is only valid for a very short period of time, sometimes just 24-48 hours, before it "explodes" or becomes invalid. The intention is to pressure founders into making a quick decision before carefully evaluating the offer.
However, while these exploding term sheets may seem tempting, especially if you need funding quickly, they simply don't exist in the VC world today. Venture Capital is not the same thing as Recruiting. When a company offers an exploding job offer to a potential hire, they are essential trying to mitigate the risk or ‘hedge’ their bets on a particular candidate. Remember, companies are typically talking to multiple candidates for the same position. Whereas in venture, VCs are not trying to choose between company X or Y that are more or less building the same company.
Unfortunately, exploding offers puts unnecessary pressure on the founder to accept without doing proper due diligence on the VC and the terms.
Here are a few reasons why founders shouldn’t panic:
VCs want to build relationships with founders. Forcing ultimatums can sour that relationship before it even begins. A good VC wants to establish trust and transparency with founders.
Deals take time. There are always multiple parties involved - lawyers, accountants, advisors, etc. Completing diligence and negotiating final terms is a process that requires more than 48 hours. VCs know this.
Competition is fierce. In today's market, great startups can take their pick of multiple term sheets from top tier VCs. The competition most likely leads to bidding wars between investors. Why? Because they’re looking for the next UBER (to make billions of $$$) So don’t expect the best investors to walk away from a deal so easily.
If any investor does make an exploding term sheet offer, take a step back. Talk to advisors and other founders who have fundraising experience. Know that you are in the driver's seat in this market and thoughtfully evaluate all options. Never feel rushed into accepting any deal without doing your diligence. The right investors will understand and will ‘make time’ for the best founders.