What is a Term Sheet Negotiation?
A term sheet is a document that contains the terms and conditions related to an investment. While it’s not legally binding, it is considered to be the foundation for future legal documents to be drafted.
This is why it’s important to read through it and consider negotiating its terms so that you feel happy with what it outlines.
Read the rest of this article for information about the negotiation process, what a term sheet typically contains, and how hiring a lawyer can help you achieve a better outcome.
What Does a Term Sheet Contain? Key Components and Information
A term sheet usually contains information about an investment or business agreement, such as by including the following points. These need to be professionally drafted and transparent for both parties to understand.
- Purpose and goals. The reason for the investment or agreement needs to be specified, as well as what the parties hope to achieve.
- Financial terms. The investment amount must be specified, along with payment terms.
- Valuation. The company’s worth needs to be included to determine investor percentages.
- Dividends. How and when investors will receive their profits needs to be clarified for transparency.
- Covenants. This section of the term sheet outlines prohibited activities during signing and closing the transfer.
- Liquidation. These preferences clarify who will get paid first when the company exits.
- Uses. The document should include information about what the investment will be used for.
- Anti-dilution provisions. This clause serves to protect investors if the company lowers the valuation of a future round of funding.
How Should You Negotiate a Term Sheet?
If you want to change some terms in a term sheet, you might wonder how to navigate negotiations with the other party. Here are some tips.
Ask Questions
Before you negotiate any terms, it can be helpful to start discussions by asking specific questions about anything you find confusing or unclear in the document. Listen to what the other party needs or wants, so you can find a way to compromise on important issues.
Consider the Binding Clauses
Although term sheets aren’t legally binding, they can contain clauses that are, such as confidentiality and exclusivity. Make reviewing these one of your priorities so you can ensure you’re satisfied with all the information they contain.
Look at Investor Voting Rights
As an investor, you should consider the voting rights term, as these will influence how much say you have in company decisions as well as what priorities will be given to you when receiving payments.
Check Your Priorities
Instead of trying to negotiate every term, you should focus on the most important things for you and/or your business team. This will help you to direct the conversation to what you hope to achieve, while providing you with not-so-important terms that you won’t mind compromising on.
You should avoid negotiating all points during the same discussion, as it can be more effective to resolve the most important points first and then consider the smaller issues later.
Strive for a Lower Valuation
It’s recommended for investors to try to achieve a lower valuation. This can help you to secure a larger percentage of ownership, boosting your returns.
That said, do your research. Have a firm grasp of the post-money valuation which displays the company’s value and their ownership stake after the investment.
Consider Your Investment Strategy
When negotiating, you should keep your investment plan in mind. For example, you might like the idea of having dividend income payments, or you might choose to let the company reinvest the money to take advantage of capital appreciation instead. Whatever the case, knowing your strategy will help you to negotiate for the best outcome.
Seek a Middle Ground
Instead of giving yes or no answers during discussions, you should always think in terms of what you can provide and gain in return. So, you could state, “If we can do X, would you be willing to Y?” An example of how that would happen is to say, “If we can increase our investment size, would you be willing to let us own 20 percent instead of 15 percent?”
Do You Need to Hire a Lawyer for a Term Sheet Negotiation?
While you don’t always require legal services during term sheet negotiations, you should consider the benefits of having a lawyer help you with the process.
- A professional lawyer will spot any risky or hidden clauses in the term sheet that can affect you.
- They’ll translate any complex or legal jargon so that you can understand all terms. This is crucial to being able to negotiate successfully.
- In funding, a lawyer will check that all the terms won’t harm future funding rounds.
- A lawyer will negotiate on your behalf, using their skills to identify what points to pursue and when to settle.
- They’ll identify any contradictory terms in the term sheet (and across other documents) to prevent future disputes.
- They’ll reduce back-and-forth or dead-end negotiations that can stall closing.
- They’ll review and/or re-draft the term sheet for legal soundness and clarity.
Where Can You Find a Lawyer for a Term Sheet Negotiation?
If you need a professional lawyer to negotiate the information in a term sheet, you might wonder where to find one. You don’t have to struggle, as online legal platforms make this an easy, stress-free task. ContractsCounsel is one of the largest online legal marketplaces where clients can connect with more than 1,000 lawyers for contract drafting and review, as well as other legal guidance.
To seek help with a term sheet negotiation, you can search on the platform for lawyers conveniently residing in your location. You’ll have access to various information about the lawyers, who have all been vetted on the platform, so you don’t have to conduct your own research.
ContractsCounsel data includes information about the lawyers’ education, credentials, years of experience, and client ratings for previous projects that have been completed on the platform. This makes choosing the best lawyer for your legal requirements a smooth, quick process.
