Posts in the blogosphere, conversation on panels of/about VCs, etc. all talk about the best way for entrepreneurs to optimize their fundraising process with the end-goal of receiving a term sheet. It’s often spoken as if the second that magical term sheet document is in hand, the process is over. Unfortunately, that’s an oversimplification which should be recognized by savvy entrepreneurs.

The goal of any VC fundraising process is in reality a bit more nuanced, as there are two key events an entrepreneur should be working towards:

1. Partnership Conviction – having not just the sponsoring partner at a VC firm, but the entirety of the firm’s partnership, on board with the investment.
2. Agreement of key terms between entrepreneur + VC firm. A meeting of the minds about the key components of an agreement (structure, valuation, key features).

Most often a signed term sheet entirely recognizes these two events (hence the simplification), but in many cases term sheets are issued before either or both of the above are present.

How can this situation happen?

1. Some VCs merely view term sheets as “marketing documents.” Given that it’s a non-binding piece of paper, it’s relatively easy to share one and appear to be further along the process of conviction and agreement than is really the case. This situation can even sometimes lure entrepreneurs into abbreviating their full fundraising process to vie for competitive offers. It doesn’t mean that the term sheet is without merit, but just that the process of conviction and agreement needs to catch up to the documentation.
2. Many times (seed) investments (especially) don’t have true partnership conviction. Depending on a partners position in the firm and the size of the potential investment, there is typically some ability to issue term sheets (and even write checks in seed rounds) before the whole team is on board. In those cases, the propensity for time to kill all deals for this round and starting the race for the next round of financing can start behind the starting blocks with the VC firm of current investors not completely bought in.
3. Entrepreneurs pushing for a term sheet from one firm to use in leverage with other firm’s negotiation. Again, it goes back to if there is really belief behind the document on either/both ends. This approach is a high risk/reward strategy… which can work, but can also fall like a house of cards if the ultimate agreement on either side is based on fear of losing the deal, not excitement about winning it.
4. Term sheet is an opening in a negotiation rather than the codification of it. Sometimes term sheet negotiation processes play out with multiple term sheets being shared to reflect the current state of discussions until one is signed, instead of just one final one reflecting the ultimate agreement.

Different firms have different perspectives on term sheets. I know some firms who won’t share a term sheet unless they believe there is complete agreement understanding in place with an entrepreneur and s/he is ready to sign immediately. Others I know view it as a fruitful way to open a dialog with items outlined in black and white as a foundation. The key takeaway is for entrepreneurs to initiate a conversation during the middle of the fundraising process with a potential VC partner to learn their philosophy on sharing term sheets and then understanding the context when one arrives (or doesn’t arrive) in an email inbox.