The Nasty Exploding Term Sheet

Exploding term sheets are nasty. If you don't know what they are, it's a fairly literal definition. Someone gives you a term sheet to invest in or acquire your company (or some other transaction), but they put an expiration date into the term sheet and if you don't accept by that date, the offer explodes. Investor Y Combinator (recently in the news for taking an investment from Sequoia Capital) posted an advisory tonight that their competitors are using exploding term sheets, and suggesting companies ignore them. Companies use exploding for a variety of reasons. But the goal is to put additional pressure on the company to accept the terms and quickly, without much further negotiation. In particular, they don't want to see a deal "shopped," which is when you take their term sheet and go to other buyers/investors looking for a better deal (which is exactly what you should be doing as soon as you get a term sheet from anyone). But they are bad news for startups, who can't take their time to find the best deal possible when presented with one. I've received a couple of these in the past and have always ignored the clauses. Generally speaking, the day after the explosion they're still very happy to do business with you. If they're not, they weren't good partners anyway. (there are exceptions, such as when certain financial milestones or other important dates are coming up, but those situations are fairly obvious).