The Coveted Financing Term Sheet
Everyone wants one. But are you prepared to negotiate a term sheet that will get your financing deal done and on terms that are best for your company?
Also known as a letter of intent (LOI) or memorandum of understanding (MOU), the term sheet is an extremely important step in the funding process. To help you get it right, below is our cheat sheet to help you nail a great financing term sheet:
1. Do You Really Have a Deal?
You are trying to raise money for your company. Given that “time is money,” you don’t want to waste your time or your money. And you certainly don’t want to start drafting detailed financing agreements before you know you have a solid deal in place.
That’s where the term sheet comes in – it outlines and summarizes the key deal terms between your company and the investor group. It is better to know early on that a deal breaker may exist, before you spend too much time and money trying to advance a financing deal that will not happen.
Also, make sure that you introduce all of your key deal points early in the funding process and certainly before the term sheet is complete. Otherwise, depending on how the financing goes and the strength of your negotiation leverage, you may not be able to insert key terms into the funding deal after a round or two of negotiations.
2. It’s Not Binding, But…
A term sheet generally is not binding, meaning that your company and the investor group only will sign up to the deal terms in the final financing agreements that are prepared based on the term sheet. The term sheet should contain a paragraph that explains its non-binding nature.
However, there usually are a few provisions in the term sheet which actually are binding, such as confidentiality, transaction costs and exclusivity-no shop provisions. Pay close attention to these provisions, because they may tie up your company more aggressively and for more time than you might expect. If there are binding provisions, then the term sheet will need to be signed.
3. Negotiate with a Lead Investor
For an efficient financing, you will want to put a solid term sheet in place that will guide the negotiation and preparation of the final financing agreements, with no major changes to the terms in the term sheet.
One of the best ways to lock in the financing terms is to negotiate the term sheet with a lead investor, so that the term sheet becomes a take-it-or-leave-it proposition for additional, follow-on investors.
Like a home remodel, if later investors want to change the terms of the financing deal, especially after the negotiation and preparation of the financing agreements, then the transaction costs of the financing will start to rise.
4. Don’t Do It Alone
It’s exciting to negotiate the term sheet. The financing is critical to your company’s future and big issues are involved – valuation, money, ownership, control, power, etc. You are making the deal happen.
However, unless you have a lot of experience negotiating the type of financing transaction before you, I strongly urge you to bring in experienced advisors who can help highlight and negotiate key terms and issues in the term sheet.
Remember that the term sheet outlines your financing deal and sets the table for the eventual funding transaction. And even though many of the terms in the term sheet are not contractually binding, your company and the investor group are agreeing on these terms in principle.
These terms therefore will have moral or persuasive force (“I am sorry but you agreed to this in the term sheet”), and you may be hard pressed to negotiate significant changes or new terms once the term sheet has been finalized.
Get the right help so that you get the best financing deal for your company.
Let us know if you have any questions or comments about the above tips for your financing term sheet. Others may be considering the same issues, so it would be great to hear from you.