In my first start-up, the VCs pulled our term sheet between signing and closing. They had a legitimate reason — our COO had pulled out of the deal. Which was my fault, for recruiting a prestigious, but sketchy, COO.
But it was a very stressful time, when the term sheet was pulled. I had 9 employees and no way to make payroll. In fact, we were about $250,000 in debt.
I had about 11 days to avoid shutting everything down. So:
- We went out and got our customers to agree to buy $6,000,000 from us.
- We went out and got our prototypes built — and shipped.
- We went out and closed a $3m deal with our key manufacturing strategic partner.
All in those 11 days.
With that …
We convinced the VCs to come back to the table. At a much lower valuation (an effective $2m pre, instead of $7m). We had to give back 50% of our founder stock. And the VCs made me sign a $750,000 full recourse promissory note.
This exceeded our family liquid net worth by 30x-50x or so. Outside of our house.
I signed it, no questions asked. If we’d failed, I guess we would have lost not just our savings but our home.
I didn’t tell my wife.
12.5 months later, we sold the company for $50,000,000.
This was a terrible idea, signing the note. I mean, I can’t even believe looking back the VCs made me do this.
But sometimes … you just do it.