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Fast to Term Sheet, Then It Got Weird

Fund: Tugboat Ventures

Posted by scottdunlap on 2011-04-23

PUBLIC:

I pitched both Dave and Dafina a mobile concept in its very early stages. Both were helpful in flushing it out, with Dave in particular going the extra mile to help recruit an additional co-founder, and helping flush out a number of business models.

After a month or so, I communicated that I had received a term sheet from another investor. Dave was quick to respond with a term sheet of his own to lead a seed round. It was not the best valuation, but the terms were friendly. Given his interest to date, I was excited to have them in the fold and began communicating to our other investors that we wanted Tugboat to lead the syndicate. The other investors gave some cautious remarks, although none could pinpoint an exact reason why they were cautious, and instead just cited "there are some big questions about Dave Whorton in our partnerships".

That's when things got weird. Dave was not thrilled when I didn't sign the term sheet within 24 hours, accusing me of many backhanded things. Negotiation of terms came back with a lot of strong language such as "in my 15 years of investing i have never seen a term like that and now question your abilities and intent...". He also said their standard due diligence was to request 8-10 references for EACH co-founder, and that if a reference was shaky, he would need 18-20 references. He wanted months to complete the process.

I went back to my other investors (with my tail in my legs, thanks to vouching for Tugboat in the first place) and shared the e-mails. They were aghast, feeling validated about their initial concerns. Within the week, we had additional term sheets at nearly double the valuation and better terms.

I'm still unsure what exactly happened here. My gut tells me that Dave is the kind of investor that can add a lot of value, but everyone around me says I seriously dodged a bullet here. My recommendation would be to check your references, and be very cautious about how you communicate your interest in Tugboat to Tier 1 investors.

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