I had a fairly short conversation today with an entrepreneur friend. He has been bootstrapping his startup for some time and wanted my advice. He received a deal put on the table by an early stage VC and in my opinion the terms stink. They weren't criminal but damn near it when you know what is standard in the market.
At the same time, he told me he's soon to run out of money, his CTO hasn't been paid for a couple of months and he's already financing some things with a loan. I've heard at least twenty variations of this situation and have been often asked what to do.
I'll usually very quickly go through options with whomever I have on the line or in front of me. Typical questions will include:
1. Do you have any other options as to financing (VC's, Angels, FFF's, loans)?
2. How much burn do you have left?
3. Are any of your customers willing to pay you up front for product or services delivered at a later date?
4. Can your employees go any longer without salary?
5. Is it possible to cut other costs quickly (rent, expenses, whatever)?
Since people are usually always at the point where they've hashed out all options, the answer to the questions above is usually "no". This then always leads to my very clear answer, which hardly ever is different. So how do you decide what to do? It's not easy but it's simple.
Are you passionate about your product? Do you believe in yourself and your product above all else? Are you willing to do whatever it takes to succeed? If yes, tell the VC to go pound dirt and pursue options. There are always options and if you aren't willing to give up, they will eventually appear.
At the same time, maybe you're a gambling man or woman. Do you want to "give it a go"? Are you also wondering whether the product will be successful? Do you have your doubts and aren't really sure how bad you want it? You get my point! If all your other options haven't panned out and you yourself aren't dead-sure you want to fight it out, sign the termsheet. As long as you don't put yourself in a situation where you are giving up more than the chance to fight another day, it's better to risk poor terms than to just give up. If you're successful, you'll have a bit more leverage even with bad terms.
Yes, there are times to simply give up and there are a ton of posts about that. This post is focusing on crap terms from an investor. If you want to keep at it and are simply torn between taking a deal or not, use my above criteria. Never forget that as an entrepreneur and founder, you usually aren't easily replaced if succesful. If you are responsible for the performance of your business, you'll most likely have more leverage at a later date than you have today so go ahead and take the deal.