
Ask HN: Is there a good way to nullify a term sheet? - BayezLyfe
That is, how can a founder get out of a signed term sheet in a way that saves face &#x2F; social capital?
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davismwfl
So I have never had this situation as the founder but did from the investor
side, although I wasn't the lead -- I have also been with a startup that
cancelled the term sheet from an investor. Just remember, a term sheet isn't
generally a legal binding document, other than to say these are the terms we
agree to and now we will work towards a final closing documents etc. Many
founders use a term sheet as a tool from one investor/group to shop others to
see if they can get a more favorable term sheet. If they can they may go back
to the original group and ask if they would like to join the new term sheet as
a non-lead.

Anyway, unless you have some non-standard term sheet, I do not think you have
to worry so much as long as you are honest and up front. If you approach this
properly it won't hurt you or your company, it is business not personal. Many,
maybe most, investors would take a better deal in 3 seconds flat if they got
one before the final docs were signed and money wired, founders have to
remember that and look out for their company and their team. I have seen
investors back out after docs are signed but before money is transferred.
Could a startup sue them, sure, will they succeed? Probably not and it will
waste a shit ton of resources and some investors have counted on that.

Just my 2 cents, but don't try to back out of a term sheet unless you already
have a new one in place from someone else on more favorable terms. But also
remember, the terms aren't the only factor, the quality and capabilities of
the investor should also be considered closely. I'd take a lower valuation
from a better investor who I know is more bought in on the success of the
company than getting a slightly better valuation with an investor that doesn't
have much to offer outside of cash and isn't as bought in.

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BayezLyfe
Any thoughts on the terms-cancellation conversation with the investor?

~~~
davismwfl
First, make sure this is a standard term sheet and you don't have some other
termination clauses or something else in there that could cause issues. Best
to have an attorney or experienced advisor take a look at that if you don't
know for sure yourself.

Assuming this is just a common term sheet, you have to approach them and be up
front, doing your best not to burn the bridge. Say something to the order, we
appreciate you writing a term sheet and we've had some time to go back over
everything with the team and our advisors (or whatever fits here) and while we
are super appreciative we don't feel like it is the best situation for our
company at this time... Notice I avoided the word "but" in that sentence, that
helps because when you say "but" everyone's mindset shifts when you are
discussing a deal etc. Hopefully that makes sense.

As in all deal type negotiations, they will likely want to pin you down to
why, because if they see you as a valuable opportunity they'll want to try to
fix something if they can. If they can't they'll walk. Just be aware, there
are a range of reactions you can get, from the toddler being pissed and
lashing out, to the professional being understanding and wishing you luck.
Generally, from my experience/knowledge it errs more on the side of the
professionals. If you get the toddler reaction then that shows they were not
going to be a good partner in the first place and should help reinforce your
reasoning to walk away.

I will just add this, make sure you have a solid reason to walk away from a
fair term sheet. If you don't that can hurt you later on with other investors.
This can happen if a new investor asks about any prior term sheets and what
happened etc. You should never lie about the situation as the community is too
small to get away with a lie for long, and if you have solid reasons it will
actually make you a better partner for them, if you have flimsy reasons it may
raise doubts or extra questions.

My disclaimer: there are other people that have more experience at this than I
do, so my advice is based on what I have seen and what I know but I am not a
lawyer nor have I done hundreds of these yet.

Good luck!

