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exploding-termsheetLast year my co-founders and I got a termsheet from an investor here in Dallas that had a 48 hour deadline. I’ve never taken ‘exploding termsheets’ very seriously and didn’t really pay attention to the clause. We sent the offer to our lawyer and the first time he could meet was 50 hours from the start of the deadline – again I didn’t imagine the investor (after having spent weeks looking at our deal) would seriously pull the offer if we were two hours late with our response.

In the meeting with the lawyer we decided we needed to negotiate a few points and I texted the investor and asked him to email a document we could edit. He responded by saying the offer expired. He said he would consider extending the deadline if we would agree to take it ‘as-is’, without any changes. I was flabbergasted.

After that exchange I knew we were done. My partner insisted on negotiating the deal with the investor and ultimately he did agree to let us make various changes to the offer. But at the end of the day the investor showed his true colors in a single text message – I knew I could never be in business with him.

If you’ve received an exploding termsheet you have two choices. You can ignore it or you can talk to the investor and explain you’re going to need more time. Some very obvious reasons are that you need:

  1. Time to review with your co-founders
  2. Time to have your lawyer review the termsheet
  3. Time to check some references on the investor

At the end of the day the investor, by including a short deadline, is signaling a lack of confidence. If he was confident with his offer he’d happily let you ‘shop’ it around town. Fred Wilson describes how he does it – find guys like Fred to invest in your company and avoid the exploding termsheet.