Uncapped Notes - questions to ask investors before accepting a term sheet

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📰 Today's Edition

When you're pitching VCs, you're focused on impressing them, not interrogating them.

But there are three crucial questions you should ask that VC before signing their term sheet.

In our years at Hustle Fund – where we've backed over 500 companies – not a single founder has asked us these questions.

But we wish they would.

Below are the three questions and why they’re relevant to founders looking to fundraise.

Ready? Let’s dive in.

Question #1: How are the GPs compensated?

(Real quick… GP = general partner, or the lead investors on the team.)

At Hustle Fund, we follow the Benchmark Capital model: equal salary and equal carry across all partners.

Here’s what this means for you: If I’m a GP at Hustle Fund, and I discover and invest in your startup, and you achieve a $10 billion exit, those proceeds are shared equally among all the partners at my fund.

This model is pretty rare.

Most VC firms operate on an "eat what you kill" system where the partner who sources the deal gets most of the carry (profit), with the remainder split among other partners.

Why should you care about how a VC gets paid? Because compensation structures impact teamwork.

Here’s what I mean:

In an equal carry partnership, every partner is incentivized to help your company succeed, regardless of who brought you in. If you need introductions, advice, or support from other partners, they're motivated to help because your success is literally their success.

With unequal carry, the partner who didn't source your deal might be less motivated to assist you – they're better off spending time on their own portfolio companies where they'll earn more carry.

Understanding this dynamic helps you know what kind of support network you're really getting from your VC fund.

Question #2: Where in the fund cycle is your current fund?

Timing matters more than you think.

You generally don't want to be the last company a VC fund backs in a particular fund cycle.

Here's why: VC funds typically have a 10-year lifespan. Remember? We talked about this a couple weeks ago.

If you're getting funded in year five and you're one of the last checks the VC is writing from that fund, that might be the only check you receive from them – regardless of how well you perform.

Ideally, you want to receive investment from a fresh fund where capital was recently raised.

This increases the likelihood that money will be available for follow-on funding in your later rounds. Many founders don't realize that their "committed investor" might not have any capital left when they need that crucial lifeline.

So please – ask where they are in their fund deployment.

Most VCs reserve capital for follow-on investments, but the timing of when you enter their portfolio matters a ton for your future fundraising prospects.

Question #3: How fast can you wire the money?

This question might seem basic, but it could save you from a cash flow crisis.

🚨Some VCs will sign documents to invest in your company despite not having the money readily available.

Yes, really.

This happens more often than you'd think, especially with emerging funds.

See, VCs have to raise capital for their own fund. And if they haven't closed any money yet, they can’t actually start deploying.

They’ll sign your term sheet and put you in a holding pattern while they finish their own fundraising. Icky but true.

Another common issue involves capital calls.

You might assume that VCs have a bank account overflowing with all the capital they’ve raised. That they sit on piles of money and toss it into the air like confetti.

Nope.

When a limited partner (LP) commits to a venture fund, they don't wire it all upfront. Instead, the VC finds a deal, then runs a "capital call" requesting the proportional amount needed from each LP.

These capital calls can face delays if LPs are unavailable, or (yikes) if they can't fulfill the call immediately.

As a founder trying to make payroll, the last thing you need is to count on money that isn’t coming anytime soon.

Always get a clear explanation of the wire timing. Understand whether the VC has money in the bank now or needs to run a capital call, and how long that process will take.

These are not awkward questions

These three questions — about compensation structures, fund cycles, and wire timing —are not inappropriate to ask.

In fact, they’ll show that you understand the risks a VC’s processes pose to your business. And that you care about de-risking the business as much as possible.

More importantly, getting this information could make or break your startup.

Understand things like how to get the right support from your VC, or when promised money will actually hit your bank account are crucial details.

So before you accept a VC’s term sheet, be bold. Be brave. Be inquisitive.

You got this,

Kera from Hustle Fund

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