Entrepreneurs whose startups have gotten over the “hump,” so to speak, are well-acquainted with term sheets. Investors—private equity partners and venture capitalists, in equal measure—typically insist on term sheets before finalizing any deals.
Many business professionals consider term sheets and LOIs (letters of intent) to be synonymous with each other. Both are general, non-binding agreements that outline the contours of an investment agreement before the deal is executed. However, LOIs are often used for more complex agreements, such as mergers and acquisitions, and some provisions of an LOI are legally binding.
Even though term sheets are not legally binding except in matters of confidentiality, they reflect good-faith effort by both parties to move forward in negotiations. The individual provisions in a term sheet provide the foundational components of a future deal. In other words, disagreement about term sheet provisions will make negotiations difficult, if not impossible.
What Should You Put on Your Company’s Term Sheets?
To begin, you should put the company’s identifying information on the term sheet. Potential investors should know the contact information for your company, yourself, and other key individuals involved in the deal.
As for the heart of the matter, you should lay out exactly how much you’re seeking as an investment. Additionally, if you’re giving up equity, the potential investor should know exactly how much of your company they would own after the deal. Will the investor gain any voting rights or decision-making authority? Include that information as well.
An important provision on many term sheets is the company’s valuation. There will be plenty of time later on in negotiations to divulge other financial information. However, investors typically want to know the dollar value of companies before and after their potential investment.
Lastly, your term sheet should include a time limit for the investor’s decision about proceeding with the deal. If an investor doesn’t really intend to move forward, it’s better to know that sooner rather than later.
Important note: If any provision in your term sheet is legally binding, make sure you include unambiguous language on the subject.
Don’t Put Too Much Information in the Term Sheet
Founders often worry about leaving out important information that would otherwise convince an investor to put up money. Including too much information in a term sheet, however, is often cost-prohibitive. Investors might want to start negotiating at the outset. The time spent modifying or negotiating a term sheet could cause you to miss out on other investment opportunities.
An effective term sheet is different for each business owner. Our team is focused on helping start-up founders and other entrepreneurs achieve their business goals, and that includes crafting the best strategy for dealing with investment agreements. If you need help determining the best path forward for your company, give IGC a call. We look forward to hearing from you.
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