Term Sheet: Founders Activities
I’m going to keep tonight’s term sheet post short and sweet, especially since I’m still reeling from the horrifyingly bad War of the World movie I just saw. Jason and I are almost done with the term sheet series (yeah, we know we keep promising that) but – like the Spielberg tragicomedy I just watched, it’s not over until it’s over (sorry – that cliche just snuck its way in – I was helpless against it – the aliens made me do it.)
Occasionally a term sheet will have – buried near the back – a short clause concerning “founders activities.” It usually looks something like:
“Founders Activities: Each of the Founders shall devote 100% of his professional time to the Company. Any other professional activities will require the approval of the Board of Directors.”
This should be no surprise to a founder that your friendly neighborhood VC wants you to be spending 100% (actually 120%) of your time and attention on your company. If this paragraph sneaks its way into the term sheet, the VC has either been recently burned or is suspicious and / or concerned that one or more of the founders may be working on something besides the company in question.
Of course, this is a classic no-win situation for a founder. If you are actually working on something else at the same time and don’t disclose it, you are violating the terms of the agreement (and – breaching trust before you get started – not a good thing as it’ll eventually come to light.) If you do disclose it – or push back on this clause (hence signaling that you are working on something else), you’ll reinforce the concern that the VC has. So – tread carefully here. Our recommendation – unless of course you are working on something else – is simply to agree to this (why wouldn’t you, unless you don’t believe in the thing you are asking the VC to fund?)
In situations where I’ve worked with a founder that already has other obligations or commitments, I’ve always appreciated him being up front with me early in the process. I’ve usually been able to work these situations out in a way that causes everyone to be happy and – in the cases where I can’t get there – I’m glad that the issue came up early so that I didn’t waste my time or the enterpreneurs’ time.
While there are situations where VCs get comfortable with entrepreneurs working on multiple companies simultaneously (usually with very experienced entrepreneurs or in situations where the VC and the entrepreneur have worked together in the past), they are the exception, not the norm.