Introduction- You and your partner are raising funds for your startup. You know the negotiations over the Term Sheet are going to be intense.
- The most important things you need to know are as follows:
One: Get the Best Advisors ASAP- You should engage your advisors -- as soon as possible (ie, as early as possible).
- They will help you ensure:
- the best outcome and
- avoid fundamental and costly errors.
Two: Term Sheets are NOT binding- Normally, Term Sheets are not binding. That's correct, Term Sheets are usually NOT binding.
- This is perfectly normal -- so,
- don’t buy that private jet just yet and
- don't assume the deal is done once they sign on the dotted line.
Three: See the Big Picture- Remember that in terms of timing, the parties typically:
- do some strategic, business and financial due diligence and then
- sign the Term Sheet (which is NOT binding) and then
- perform full due diligence and only after that,
- enter into a Investment (or other) Agreement (which IS binding).
Four: Formulate & Remember your Objectives- What do you want? You have to determine your goals BEFORE you start negotiating with the investors.
- Do you want to sell out completely?
- Do you want to remain a substantial owner of the startup?
- Do you want to continue working at the startup after the sale?
- Do you want to retain control no matter what the cost?
- Discuss with your advisors and decide what you want BEFORE the start of negotiations.
Five: Determine your Limits- How much funds do you wish to raise?
- What is the minimum amount of funds you want out of the sale?
- What is the maximum proportion of shares you are prepared to sell?
- Do you want to retain any control over the company? How much control?
- Who will appoint the majority of the directors? You or the Investors?
Six: Understand what the Investors want- Typically, investors want to
- invest in your startup
- in return for convertible preferred shares
- that they intend to convert into shares
- which they will sell for maximum profit
- when they exit the company.
Seven: Align Both Sides' Goals- No matter how intense or even bruising the negotiations, remember:
- the investment comes into your startup only if the parties come to an agreement.
- For this to happen, there must be give and take.
Eight: (On the other hand,) Always be Ready to Walk Away- As far as possible, line up alternatives so that
- you are not forced to accept unacceptable terms.
Nine: Ensure Adequate Time & Resources for Due Diligence- You must provide in the Term Sheet sufficient time for due diligence; and
- ensure full access for the investors to perform said due diligence.
- The time for due diligence often range from 30 to 90 days.
- By the end of this period, you should ensure that the investors have the information they need to decide
- whether or not and
- on what terms
- to invest in your startup (via a binding agreement).
Ten: Negotiate a Binding Agreement & Satisfy its Conditions for Funds to be Injected- This is what the (non-binding) Term Sheet is supposed to lead up to.
- It is supposed to lead up to:
- a Binding Agreement and then
- upon satisfaction of all condition precedents,
- injection of funds into your start up.
- To ensure that this in fact happens,
- first, negotiate a fair and achievable Binding Agreement and
- then, satisfy all the conditions.
Action- If you have any questions or are thinking of raising funds for your company, please feel free to call Lam & Co. at 6535 1800.
