When one of your friends is too scared to go along with the simplest of things because they believe that they're going to get caught or get in trouble. It is believed to have originated from the Roman times when a gladiator called Shermwood wanted to back out of a fight to the death so the upset masses, who wanted to see a bloodbath, started calling anything similar to that as 'Sherming out'.
Billy: Hey Charlie, wanna go do some weed?
Charlie: But what if my Mum catches us? She thinks I'm an epic dude.
Billy: Are you just sherming out again?
Charlie: *Cries and runs off*
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