> VC backed out at the 59th minute after term sheets had been exchanged and agreed to, paperwork signed.
I'm curious how this works, legally. If they make the offer and you sign the papers, doesn't that legally obligate them to follow through on their offer?
Approximately 100% of institutional VC term sheets have a "conditions precedent to closing" section that includes something like, "completion of due diligence to sole satisfaction of Investors." Often there are other "outs" as well.
Really, the moral obligation to consummate a deal is only policed by reputation. And that is not often discussed out loud (see, for example, how parent describes the deal but doesn't name the last-minute-back-out VC).
(Plus there are whole other big cans of worms for discussing investor reputation online "out loud" -- it CAN be done and there is a lot of truth out there, but a ton of noise. The real scoop is generally spoken 1:1 over the phone, or over coffee in person.)
Interestingly, the whole gist of TFA is that investors should move fast once they have conviction. But the more they do that (instead of "front-loading" diligence and negotiation), the more like it is that you get last-minute backing out (or perceived backing out).
The way the VC firm I'm affiliated with has always handled it is to "front-load" diligence, and treat a signed term sheet as if it were very nearly binding and final. I think we've pulled ~ 2 signed term sheets, out of almost 100 new deals over the years.
Point is, you can't have your cake (enjoy super-fast handshake commitments without the diligence that is "due") and eat it too (enjoy high certainty of closing on those commitments).
A contract isn't complete until someone actually spend money (or something of value) in reliance. The standard remedy for breach of contract is to unwind the victim's situation to the position they were in before the contract was signed.
So at the moment you sign the paper, but don't hand over money or burn other bridges or whatever, it is trivial to tear up the paper.
I'm curious how this works, legally. If they make the offer and you sign the papers, doesn't that legally obligate them to follow through on their offer?