“I’m sorry Brett, but we’re not going forward with the investment,” “Robbie” said to me. The week before Robbie and the other members of the investment syndicate had signed the term sheet. And now they were pulling out of the deal.
I spent the next hour on the phone convincing Robbie to stay in the deal. Robbie agreed to talk with his partners about staying in the deal.
What would happen to Robbie’s fund if they pulled out of the deal: Nothing. Robbie and his partners could walk away and have no real consequences to their actions.
Here’s the thing: Your term sheet is a non binding document.
You may have noticed that there was a statement in the term sheet that you signed saying something like, “This is a non binding document.” In other words, either party can walk away from the agreement before funding closes.
I called Gill, one of our existing investors, after I got off the phone with Robbie. Gill’s response was, “We’re seeing this more and more that VCs are walking away from signed term sheets.”
You need to do what’s right for you.
Now I’m not saying you shouldn’t take your commitment to the signed term sheet seriously. I am saying that you have to act in your company’s best interest.
In this case, you need to evaluate the offer you are getting to sell the company. If the offer is a good offer, then you need to come to an agreement with the buyer to sell the company.
But guess what that means?
If you decide to sell the company, you will sign some sort of memorandum of understanding or letter of intent with the buyer. In other words, you just signed another term sheet.
Selling a company is just like closing a funding round. You have to go through a diligence process. And there’s always an out for the buyer if they decide to terminate the process.
There’s no guarantee that the buyer of your company is actually going to buy the company.
Everything will be vetted during the diligence process. Your financials, your contracts with vendors, your contracts with customers, any loans that you have, all of it will be reviewed in detail. Any problem that the buyer finds might be a reason to terminate the deal.
You have to be intellectually honest about how real the offer is to buy your company.
For example, I’m working with someone right now that has an offer from a very large public company to buy his company. They’ve already agreed to the basic terms.
All that’s left is for the CEO of the large public company to sign off on the deal. The deal was supposed to be signed by Tuesday, and it’s Thursday and the deal hasn’t been signed yet.
The reality is there is risk until the money is in the bank. The same is true with VC funding too. You are the only one who will have a sense of urgency, in either case, to close your funding or sell your company.
For more, read: When Should You Sell Your Company?