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Your Term Sheet Obsession is Killing Your Returns
Hot take: The advice you're getting about term sheets is wrong. It feels productive, but it's a trap that's actively destroying your portfolio's potential. Let's talk about the uncomfortable truth.
I’ve seen it a hundred times. A new syndicate lead or a junior VC gets a hot deal in their inbox. What’s the first thing they do? They jump straight to the term sheet. They spend days, sometimes weeks, red-lining every clause. Liquidation preferences, pro-rata rights, board seats… they fight for every little scrap of control. They think they're being a tough, savvy investor.
They’re not. They’re just being a tourist.
I remember one deal, back in my early days. A founder I really believed in was raising a seed round. The product was incredible, the market was wide open, and the team was hungry. But the lead investor, a guy from a small, no-name fund, was obsessed with getting a 3x liquidation preference. He wouldn't budge. The negotiation dragged on for a month. The founder got so frustrated he almost walked away. We eventually got the deal done, but the relationship was already soured. That early friction set a negative tone for the next two years. The company eventually failed, not because the product was bad, but because the founder and the board were constantly at odds. All because of a term sheet clause that never even came into play.
That experience taught me a hard lesson. The term sheet is the most overrated document in venture capital.
The Illusion of Control
Why do so many investors get this wrong? Because the term sheet gives them the illusion of control. It’s a tangible document. You can print it out, mark it up, and feel like you’re doing something important. It’s a lot easier than doing the real work: the messy, qualitative, human work of evaluating a founder and a market.
Here’s the reality: if you’re relying on the fine print of a term sheet to save you from a bad investment, you’ve already lost. The best founders won’t sign a predatory term sheet. And even if they do, a few extra percentage points on your liquidation preference won’t turn a failing company into a winner.
Your time is your most valuable asset as an investor. Every hour you spend arguing about participation rights is an hour you’re not spending on things that actually matter. Things like:
- Talking to customers. Are people actually using this product? Do they love it? Would they be sad if it disappeared tomorrow?
- Digging into the market. Is this a real, growing market? Or is it a niche that’s about to be swallowed by a bigger player?
- Getting to know the founder. Is this someone you want to be in business with for the next 10 years? Are they resilient, coachable, and relentlessly resourceful?
These are the questions that determine whether a company will succeed or fail. They have nothing to do with the term sheet.
A Better Way to Invest
So what should you do instead? Flip the script. Spend 90% of your time on due diligence and 10% on the term sheet. My process looks something like this:
Founder First. The first thing I look at is the founder. I’ve backed over 200 companies, including giants like OpenAI and Scale AI. The common thread isn’t the business model or the market. It’s the founder. I look for people who are obsessed with solving a problem, who have a unique insight into a market, and who have a track record of getting things done.
Market Second. Is this a venture-scale opportunity? I’m not interested in small, incremental improvements. I want to back companies that have the potential to be category-defining. That means a big, growing market and a product that is 10x better than the competition.
Traction Third. Show me the data. I want to see evidence of product-market fit. That could be revenue, user growth, engagement metrics… something that shows me that people are voting with their wallets or their time.
Only after I’m convinced of these three things do I even start to think about the term sheet. And by that point, the terms are usually the easy part. If you’re aligned with the founder on the vision and the opportunity, the specifics of the deal are just details.
The Syndicate Signal
Another thing to consider, especially if you’re running a syndicate, is the other investors in the round. Who you invest with is almost as important as who you invest in. A strong syndicate of experienced, helpful investors can be a huge asset to a company. A weak syndicate of passive, unhelpful investors can be a liability.
When I see a term sheet, I’m not just looking at the terms. I’m looking at who else is on the cap table. Are these people I respect? Do they have a track record of adding value? Or are they just along for the ride?
Don’t be the investor who’s known for fighting over term sheets. Be the investor who’s known for finding great companies, for being a helpful partner to founders, and for making smart, conviction-based bets. Your returns will thank you for it.
Forget the term sheet obsession. Focus on what really matters. Find the best founders, in the biggest markets, with the most traction. The rest is just noise. '''
Frequently Asked Questions
How can I apply this thinking to my own situation?
Start by identifying the core principle behind the opinion, not the specific example. Then ask yourself: does this principle apply to my context? If yes, test it in a small, low-risk way before going all in.
Do all experts agree with this view?
No, and that's fine. The best ideas in business are often contrarian. I share my perspective based on my experience and data, but I encourage you to seek out opposing viewpoints and form your own conclusions.
How has this view evolved over time?
My thinking on most topics has changed significantly over the years. Early in my career, I held many conventional views that experience proved wrong. I try to update my beliefs when the evidence changes.
What's the most common pushback you get on this?
People often push back by citing exceptions or edge cases. And they're usually right that exceptions exist. But building a strategy around exceptions rather than patterns is a losing game for most founders.