As stated by the other posters a VC backing out of an investment after issuing a signed term sheet is a rare occurrence among established and reputable VCs. The reason for this is that successful investment in a startup depends on reciprocal trust. The investor trusts that the startup will conduct itself properly by both being transparent about its operations and prospects so that the investor and gauge risk properly. Similarly, the startup trusts that the investor will faithfully adhere to its obligation to invest in the startup. Further, an investor who bails on a transaction after issuing a signed term sheet will likely find that word travels fast in the startup community which would certainly hurt its ability to find willing and quality startups to invest in if startups fear having the rug pulled out from underneath them by the investor at the last minute.
There may be justified circumstances under which a VC may back out particularly if diligence issues arise late in the game which would present undue risk to the investor. Additionally a VC may be reluctant to back out of an investment after the execution of a signed termed sheet given a growing trend among courts to award damages to the other party seeks damages for the failed transaction. Investors can be found to have breached its duty to negotiate in good faith entitling the jilted party to “benefit of the bargain” contract damages.
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