We (Cayuga Venture Fund) just signed up a term sheet with a new company (Company X).  No need to disclose the company name or industry for purposes of this post.  Rather I want to briefly comment on the process leading up to the term sheet and next steps.

First, the process:

1.  We first engaged with Company X in mid August. It is now mid December.  So our diligence and exploration process took us 4 months.  That is normal for us.

2.  The diligence involved us learning a great deal about Company X’s industry because we have not done a deal in this space previously.  It involved calls with 4 or 5 parties in the space.  It involved a ton of back and forth with Company X’s CEO.  It involved Company X finding a technology lead during our process.  It involved a lot of work by Company X (and by us).

3.  Critically, during the process, we came to trust the CEO and the team.  The CEO was hyper responsive to requests.  He struck the right balance between “salesman” and “information provider”.  This is not always easy.  I loved the fact that the CEO was the person feeding us the answers.  No delegation.  And they were typically good answers.

4.  Also, during the process, we had to clean up the company’s cap table and make sure that we all agreed on who owned what on a pro forma pre-money basis.  Without having a complete pre-money cap table, it is impossible to calculate a share price.  I use the term “pro forma” as often there are equity issues that need to be resolved prior to the deal closing that are NOT currently reflected in the company’s current cap table (like planned grants to advisors, co-founder true ups, etc.).  Sometimes those issues take extra time to resolve.

5.  We presented our first draft of the term sheet to Company X about a week ago.  I told the CEO that I was presenting a basic Series A term sheet with very normal terms.  I called him prior to delivery to point out a few things to purposely draw his attention to them.  No surprises.

6.  He came back with very few comments after reviewing with legal counsel and some of his others advisors.  Perfect.  Fair all around.  The way it should be.

Now for the next steps.  Here is how I outlined them to the CEO:

1.  Line up the balance of the investors.  We are doing $400K out of $1mm, so we need to get commitments from about $600K of additional investors.

2.  Once the $600K is lined up or mostly lined up then I will ask our fund’s lawyers to draft the deal docs and we will engage IP counsel to do an IP review (high level).   It is important to “turn $$on$$” counsel only after we feel good about the deal closing.

3.  Company X will respond to our “boring” diligence request list items by setting up a file sharing box.   We will then review and get our lawyer’s input on items as necessary.

4.  Get the investment documents all negotiated and close the deal in January.  Hopefully there won’t be much to do on the documents, but there are always issues.

I am writing this all down as I think it is important to understand the process at a granular level.  There are a lot of steps and they take time.

Let me know what questions you have.  And Happy Holidays!

One of my favorite aspects of both my jobs (VC and Cornell) is making connections with people.  Real, in person connections that last.  I also find that using the connections is satisfying.  But perhaps the biggest reward is when using a connection results in something very unexpected.  Here is an example (and I am keeping names fictitious as this deal is not done yet).

Our fund recently gave a term sheet to a company in what I would call the technology enabled B2C retail space.  Company makes a custom made product that you wear, but the “making” is highly tech focused, specialized and personalized.  The company is quirky in that regard.  Quirky is a good attribute.  It also has the potential to get very big.

So I got permission from the founder of the company (let’s call her Suzie) to share the deal with one of my VC friends at Fund X (let’s call my friend Joe).  I have known Joe for a long time.  Both of us are Cornellians and our Cornell lives intersect professionally.  Anyway, Joe looked at the company’s materials and decided they were strong enough to share with a few other people that he knew had interest in the space.  One of those people is one of the most well-known female angel investors in NYC (let’s call her Jane).  I had no clue that Joe knew Jane.  I thought “Long Shot, but it certainly cannot hurt.”

So Jane gets the material from Joe, meets with Suzie (the company founder), loves what she sees, but more importantly really likes Suzie.  Suzie feeds Jane more information, and we talk about how to “on board” Jane and get her involved in the company as an investor an advisor.

Three weeks later, after a few more meetings between Suzie and Jane, my partner and I get an email from Jane that starts with “Okay…just finished speaking with [Jane]. SHE IS INVESTING!!”

What joy!  Suzie did the hard work, which makes me incredibly happy and validates Suzie’s abilities (always nice to know prior to investment – we have not invested yet).  Jane is known to be an incredibly helpful investor (lots of connections, passion, etc.).  And Suzie is so excited and motivated.  She wrote in the same email “[Jane] really gets what we are doing and believes its a game changer.  Okay…now I need to go jump for joy and burn off some of this extra energy!!”

Back to my point – this whole unexpected outcome resulted from my initial outreach to Joe.  I trusted Suzie enough to introduce her to Joe.  Joe trusted me enough to take the meeting with Suzie and then introduce Suzie to Jane.  Suzie got Jane on board.  And all without LinkedIn, Facebook, Twitter, Tumblr…..whatever…..

Use your personal connections carefully, but use them……the old-fashioned way.