You have successfully navigated negotiations with your venture capital firm. Congratulations!

But what happens next? After all the terms have been negotiated, the venture capital firm will draw up a term sheet that summarizes all the important items, as well as the proposed structure of the deal.

A term sheet is simply a summary, and all summarized items will be expanded upon later in the closing documents. While the term sheet is non-binding, it is still used as a document to set forth expectations of both parties until the actual closing.

Included in a term sheet you may find:

o   The total invested dollars provided by the venture capital investors

This may be a single dollar amount, or broken down into separate disbursement amounts at agreed times in the future.

o   The target date for closing the venture deal

The closing for venture capital doesn’t happen overnight. Due diligence is still required. Usually the closing is set on an average of 60 days from the date of the term sheet.

o   The division of capitalization of the company

This is where you will see who will own what part of the company after the closing occurs. For instance, a venture capital deal might require that they own 55 percent of the company, and the founders will retain a 45 percent ownership stake.

o   The type of security the venture capital firm will eventually own

If the goal is an IPO, the venture capital firm will clarify up front whether they desire to own preferred stock, common stock, or perhaps convertible debentures.

o   The number of shares

In addition to the type of stock, the venture capital firm will outline how many shares it requires to purchase up front at the IPO.

o   Dividend distribution

The term sheet may also set forth how future dividends are to be paid to the venture capital firm as stockholders.

o   Distribution of sale proceeds

If the company is sold prior to an IPO, the term sheet also will explain how final sale proceeds will be distributed to both founders and venture capital investors.

Though the term sheet is not a binding document, it is created as a reminder of the terms agreed up on in negotiations. With the term sheet, all parties have a clear understanding, and there are no disagreements up to closing time.

As a matter of need, entrepreneurs with a great business idea and a start up company want money immediately to continue on the journey to success. However, a venture capital firm who is willing to invest in a new start up company also has a need to be thorough in its due diligence. Thus, there exists a division of practicality between the wants of an entrepreneur and the needs of a VC firm.

Entrepreneurs who fail to understand this practical funding timeline also are likely to fail in their business. Budgeting time for venture capital investment funds to arrive to the bank can prevent many mistakes along the road to capitalization. How can a new business survive if existing capital is almost on empty before applying for venture funding?

After getting an approval from the VC firm, how long do you wait before obtaining venture capital funding? The answer is always, “it depends.”  

If you ask an entrepreneur how quickly they expect VC funding to arrive at their bank, the answers are not surprising. According to a poll conducted by the authors of the book, Inside Secrets To Venture Capital, entrepreneurs answered:

Time to Closing       Entrepreneurs’ Response

Under 30 days           22%

30-60 days                  25%

60-90 days                  20%

90-120 days                15%

120 days or more       18%

In contrast to the answers provided by entrepreneurs, the same question was posed to VC firms about how long entrepreneurs should expect the funding process to take. Here are the results of their responses:

             Time to Closing        VC Firm Response

Under 30 days             1%

30-60 days                  18%

60-90 days                  45%

90-120 days                26%

120 days or more       10%

You can see the chasm separating entrepreneurs’ expectations and the VC firms’ closing reality. Almost half of entrepreneurs expect to receive funding in 60 days or less, while the actual average funding time is between 60 and 90 days.

However, when VC firms were asked about their quickest funding time, 80% responded that they were able to fund in less than 60 days, and 41% were able to fund in 30 days or less.

The point is clear. Entrepreneurs should budget plenty of time to obtain venture funding. Never wait to the last minute to approach VC firms. You never know when you’ll receive a “yes” answer, and then you can expect at least 2 months or more before funding arrives.