Issue No. 64 - April/May 2012
Terms Sheets or Death Warrants
by Conor McKenna
The Terms Sheet is perhaps the most important document the entrepreneur can get right. All else fall – or hangs – from it. The Terms Sheet sets out the basic framework for the deal. It can be a excruciatingly boring document to develop and read – particularly if the language used is like a foreign tongue but the serious entrepreneur embraces it and gets comfortable with it as her wealth is secured or squandered in this one document.
Once an Angel, an Angel syndicate or a Venture Capital firm indicates its intention to invest in a company, there are a number of important issues to be negotiated. Once agreed, this framework for the investment will be set out in a Terms Sheet which records the parties understanding of the key issues. Think of the terms Sheet as a Heads of Agreement. Key issues to be resolved at this stage include the form of investment, protections to be given to the investors, rights of the investors to appoint board representatives, control over major decisions, information rights, preemptive rights and exit strategies.
The Terms Sheet will govern the investment until such time as Due Diligence is completed by the investor and the parties negotiate the detailed legal Shareholders and Subscription Agreement. The major benefit of a terms Sheet is that it focuses the energies of the parties on the major issues early in the process, saving both time and expense in drafting formal agreements later.
The real issue here is that the terms Sheet is usually written by the investors side of the deal – their lawyers in particular – and they have done them multiple times and know what protections to put in that best suit the investor at the detriment of the entrepreneur.
It is usually a good idea...