In 2 out of the 4 term sheets that we signed last month, founders have acted on legal advice (certainly the worst kind) provided by other founders. To use the legal advice provided by a fellow founder just because he/she has previously raised capital is as good as the argument that an astronomer should teach an astronaut how to space-walk, just because he has seen the stars, in space.
After a recent call with founders who argued animatedly on several points that were already in tandem with EXACTLY what they were asking for (they just hadn’t bothered to read carefully), I realised that instead of using the services of a legal firm they were acting on the gyaan (divine knowledge) so generously provided to them by a founder friend. This so-called “expert advice” was given to them without even having read the term sheet! Finally, we ran out of patience in dealing with these founders and the deal fell through.
Founders tend to forget that as Investors, we have an active interest in increasing the value of the company i.e. for all shareholders involved, including the founders. When their share value goes up, so does ours. However, when founders start asking for concessions that are not even granted to the founders/promoters of listed companies, it creates serious doubts about their intentions of raising capital and whether it is being raised for reasons that are not being revealed.
It pains me to see excellent deals and founders jump off a cliff by acting on advice provided by people who themselves have a limited understanding of the terms. Therefore, I am working with Nikunj on a project to create a series of blog posts or vlogs that will explain the key terms in a term sheet in depth. We are in conversation with a few online publications and video channels to feature this series so that it will reach a wider audience and are considering producing it ourselves.
Until then, to all founders that are raising money, it is my sincerest request to, PLEASE! PLEASE! PLEASE! (please) reach out to an investment banker or a legal professional with prior experience in investment grade paperwork to get advice and not a fellow founder who has raised capital. It won’t cost more than a lakh and I can assure you that it will be money well invested.
97/2018
