An early-stage VC shares his advice for avoiding 'toxic' term sheets - Business Insider

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This early-stage VC says startups can still negotiate funding term sheets, but founders are facing a new predicament: valuation or 'toxic' terms

to keep their companies afloat, and some investors are more than willing to take advantage of the leverage after years of giving founders the moon and then some. Together, it's a recipe for disaster if founders aren't savvy enough to nip it in the bud, says Wilcox.

Being an opportunistic investor has traditionally been a selling point for VC firms, signalling that a firm was willing to back a promising startup even if it didn't fit neatly into its investment thesis. But in the current economic climate, Wilcox says, an "opportunistic" VC could have a more cynical connotation, indicating a mindset among some investors to press their advantage on term sheets.

Many VC investors are just starting to raise their heads again after the turmoil of the coronavirus. As they hunt for new deals, VCs grappling with a new challenge: how does an"The question is, can you invest in a founder you've never met in person?" Wilcox said. "Investors are trying to figure out how to do business, which is more difficult at the early stage because at the later stage, you are just looking at the financials. At the earlier stage, it's just a handshake.

For the last several years, VCs in Silicon Valley and beyond have catered to founders with special terms to deals that rewarded them with outsized control of the company regardless of how many investors were on the cap table. It was a winning arrangement that let founders run the show and investors cash in. Now, investors are rethinking whether those terms are useful in a world that is infinitely riskier than it was just a few months ago.

 

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