Funding rounds are taxing. Whether you are running your first uncoordinated family and friends round or preparing for a large Series B event, by which stage you are well versed in fundraising for your business. Here is a tale of a seed round gone wrong.
I recently had the opportunity to journey alongside a startup founder, applying for a seed round, and in this case, I was helping the founder prepare for the round, not from the perspective of evaluating the deal as a funder. We worked hard. The founder getting through the first number of meeting gates to confirm mandate fit with the funder, and the rest of us, assisting the startup in getting their data room ready, financials up to date, IP and statutory discussions, legal contracting checks, the whole works, in preparation for the DD.
Three months into the process, the term sheet is presented to the founder, and the next phase of hard work commences to prepare and negotiate the (very complicated) term sheet. To safeguard the decision to be that of the founder’s ultimately, I always wanted to ensure we carefully navigated the journey between pushing and pulling, moving the process along as quickly as possible. The founder is a technical expert in his business, so he was not fully equipped (at this stage) in deal-making, and a couple of fundamentals then slipped through the cracks during the term sheet phase. But a signed term sheet is a signed term sheet. Whether it could feel like a non-binding legal document, it is the foundation of how the deal is put together.
Another six weeks after the signed term sheet, the full set of legal documents is sent for perusal, and this is where the wheels come off. Six more weeks of extensive discussions, meetings, messages, facilitations, and mediations, but more was needed to solve the very complicated, founder-unfriendly terms for this seed round. This process leaves the founder out of runway, humour, and hope. On the other side of the table, the potential funder was frustrated with the perceived disparity of heart between where the funder was at the term sheet stage versus where they found themselves at the end, unable to get the deal over the line.
What were the five key lessons I took away from this horrible ordeal, as I felt equally responsible, as an ecosystem player, with the startup and funder for the failure of the deal, that I could share with startups going through their first seed rounds: