It’s important to understand why your business may need a term sheet for your upcoming investment round. Speaking to Helen Goldberg, COO of LegalEdge, find out when they’re necessary, what to expect and what they should cover.
Do I need a term sheet?
Not necessarily, particularly for early stage/seed investment, but it can help sort the wheat from the chaff.
Why? It will show if an investor is serious and if so, whether their terms are going to be acceptable before you spend too much time/energy/ money on the process and formal legal docs.
Aren’t they all the same? No! They can and do vary so don’t just accept it, make sure you understand it and are ok with it, and if not negotiate. Don’t accept “this is market standard”.
Why do I care if it’s not legally binding? It will highlight if there’s anything you can’t live with early on, which will save you time and money in the long run, i.e. before you get into the big legal docs. It can also be hard to row back later on in negotiations if you’ve agreed something at the outset that you don’t like. Even if it’s not legally binding (and beware of the bits that are). An investor may pull out if you do try to renegotiate. And you could be on the hook for their costs if you do (the binding bit). So, it’s worth putting the effort into getting it right at the start. It also might give you a flavour of how committed the investor is, how easy they’ll be to deal with longer term, etc.
What happens afterwards? The investors will carry out due diligence and full legal documents (which contain more detail) need to be produced/ reviewed/ signed. These can (should) be nice and simple for early-stage investments. Potential problems can arise if something significant is found in the due diligence, market conditions change, or there’s a disagreement on the detail. Otherwise, once signed, investment funds will be transferred, and shares issued.
What should a term sheet cover?
LegalEdge can help with your term sheets and investment rounds – to find out more drop them an email today on firstname.lastname@example.org. They can also manage your day-to-day legal matters, helping to prioritise what’s important, reducing risk and proactively managing your legal strategy, workflow and budget using the right people, processes and tech.