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After having obtained the investors’ agreement in principle to take part in a round of funding, a number of founders believe that the hardest part is behind them. It is however necessary to quickly finalise a term sheet that summarises the main conditions of the investment being considered. Beyond the content of the term sheet [see Negociating an M&A term sheet in ten questions], we have indicated below a few insights to better understand this key stage of fundraising.

Who takes the lead?

Answering this question will depend on the investor profile. Business angels (just like friends and family) will happily let the founders draft a first version of a term sheet. Conversely, institutional investors will generally prefer to write a first draft based on their own template. If several institutional investors co-finance a same round of funding, the lead investor will take control of the project.

It is more complex to define who has control over changes to the document during negotiations. The clauses of a term sheet are generally quite technical, so it is quite common that the person who wrote the first draft also makes the required adjustments. In any case, for the sake of efficiency, it is preferable to discuss the changes prior to putting them in writing.

Please bear in mind that the term sheets suggested by institutional investors usually only allow for minor negotiation. However, a number of points can be discussed, all the while respecting market practices.

How much detail is expected?

There is no standard model: some term sheets are hardly longer than one page, while others have pre-drafted clauses in appendix. The author must bear in mind the primary objectives of the term sheet: to secure exclusivity of discussions, and above all, to save time. We therefore recommend that a term sheet be concise (maybe as a list or table) but that it covers all key topics, so that:

  • the parties find no deal-breaker during the drafting stage, even if exclusivity has been given; and
  • drafting the relevant documentation is speeded up.

The level of detail of each clause must also be suited to the legal knowledge of the parties. The technicity of a term sheet must never hinder the good understanding by each party of its rights and obligations.

What are the risks during this fundraising stage?

Never underestimate the importance of the discussions that will take place during the negotiation of a term sheet. Indeed, once a right is agreed to, or an amount is granted, it will be difficult to change it at a later stage.

Conversely, if the term sheet does not cover all the topics or if negotiations begin to flounder, do not overestimate the importance of the term sheet, which materialises the agreement in principle of the parties but is not binding in itself. Some founders will thus prefer to push back certain discussions to later, to secure the participation of their investors as far as possible.

Ask around?

As founders, you are in a delicate position: some concepts may seem obvious, but can hide important stakes.

Be sure to prepare discussions ahead, do not hesitate to contact entrepreneurs who have “been there, done that”, and discuss the matter with your bank, lawyers and advisors.

Conclusion: how to approach negotiation

As part of the negotiation itself, the parties must bear in mind this rule: discuss the interests of each party and reconcile them in the best possible way rather than stand firm on your positions. This general principle is particularly applicable to funding round term sheets for a win-win operation, with protected investors and a motivated management.