Deciphering Term sheets

Next up is when you get the cash. The funder might make all of the cash available as soon as the deal is closed or you might receive the cash in tranches i.e. broken up into smaller amounts. The disbursement schedule might be time based or it could be milestone based. If it is milestone based, you’ll need to agree on what financial, social and/or environmental milestones need to be achieved for the funding to be disbursed. We talk more about using social and environmental milestones for tranching in the book. Agreeing to tranches can be a great way to reduce risk for a funder. While it is riskier for the founder, it can provide an opportunity to prove that you can achieve what you have promised. The important thing here is to have clear, easy to measure milestones that are achievable and realistic.

And finally, the use of proceeds is about how the capital can be used. The use of proceeds section details any restrictions about what you can spend the money on. In some term sheets, this clause won’t even be included as the spend is entirely up to the funder. In others, there will be very specific instructions around how much can be spent on what projects or categories.

Some funders might require you to submit a business plan or a use of proceeds and the agreement will require you to seek approval to deviate substantially from that plan. As a founder, you’ll have to decide how important flexibility is to you. You’ll need to understand why the funder needs assurances around how you’ll spend the cash. Is it because they want to make sure you are working towards your social mission? Is it that they are concerned about the strategic direction of the company? Have they given you the capital for a very specific purpose, such as buying a building or building out a new product? Once you have established the need for this clause, you should negotiate it in a way that provides the assurances the funder needs, but doesn’t restrict you from running your business the way you want to and providing you with the level of flexibility that you need to make your business a success. You may decide that the conditions in this clause are just too much and this may be a walk away point for you as a founder.

It is worth noting that, in general, funders are not keen to have their new cash used to pay off old debt or to buy out previous shareholders (referred to as “secondary sales”), so this will often be stated here. If you need to do either of these things, you’ll need to clear this first with your funders and provide good reasoning why this is in the best interest of all shareholders.

For angel investors and venture capitalists, there are a few different ways to value an early-stage company. Realistically, none of them are perfect, or even close, because there are just so many unknowns. Almost all investors look at the different data points and come to an estimate that makes the most sense to them. I’m sure you’ve heard this before, but it really is more of an art than a science.

One data point is simply how much money the company needs and what percentage of ownership the founder is willing to give up and/or the investor thinks is fair to take at that stage of investment. This is very subjective and can be as simple as the fact that a very early-stage company needs $30,000 and an investor generally takes around 10% ownership at this stage, so the company is deemed to be worth $300,000.

Another data point is how much other, similar companies have been valued at. Often this is looked at through multiples. So for instance, if a close competitor had a post-money valuation of $300,0005 in their Series A when they had $30,000 in revenue, then that would imply a 10x revenue multiple. If they had 3,000 customers, then it would imply a 100x customers multiple. Investors can use these multiples to approximate what your company is worth at the outset based on your financial model.

If you have already raised capital, another data point is how much investors paid per share in the last round. Investors often base the value of a company on what others were willing to pay in the past. This can lead to valuations based off of little more than investor excitement in a deal and a fear of missing out (FOMO). See: Theranos and every Softbank investment.

Another data point is how much the investor thinks their share in the company will be worth at exit. Many investors use the First Chicago Method here. Also called the Venture Capital Method, this type of valuation looks at the projections for the company and estimates what a sale or IPO in the future would value the company at. It then estimates what the investors’ share of the company would be worth at that time. This means that if in ten years time a company is going to list at a valuation of $2 billion and the investors’ share in the company is expected to be diluted to 1.5% after several rounds of fundraising, then the investors’ shares would be worth $30 million. If the investor puts in $1 million during this round, that would translate into an IRR of 40%6.
The process that I have just described is for traditional angel or VC valuations. This book was written for founders and funders who are interested in options outside of this traditional equity path. This means that many of these agreements do not require traditional angel or VC valuations. Nonetheless, you’ll find that some of the agreements we are discussing in this book do require some sort of valuation. For a SAFE, this is in the valuation cap. For a redeemable equity agreement, either a valuation will be agreed upon upfront, or the contract will state that a fair market value will be agreed between parties or solicited from a third party expert in the future.
For many of the other agreements, the investor’s return is expressed as a multiple of their capital invested, so a valuation of the company is not needed. Anytime a valuation number appears in a contract, it is important as a founder not to become fixated on the valuation at the expense of understanding other elements in a term sheet. While the valuation might seem to be the most important aspect of the agreement, in actuality, the control terms in the next sections could have a much larger impact on how you run your business.

The cap table shows the current ownership of a company. It is a table of who owns what shares. If you are agreeing to issue shares in a term sheet, you’ll need to have a pre-money and post-money cap table. i.e. the ownership before and after the shares are sold or issued.

In order to allot shares in an equity round, you need to issue new shares. As you’ll see in the example capitalization table below, when a new investor invests in a round, the shares are issued to them, which means that there are more shares outstanding. If the current shareholders did not acquire shares in this round, their ownership will decrease -- i.e. their ownership will be diluted.

An employee share option pool (or ESOP) is a set of shares set aside to give or sell to employees. Traditionally, equity investors have founders set this up to be able to entice new hires into the company as early-stage companies can’t pay big salaries. There are two ways that these are set up during an equity round: pre-money or post-money. If a funder requires an option pool to be set up pre-money, then the founders will have to take some of their shares and set them aside for the pool. If it is set-up post-money, then the pool is created by issuing new shares, which means it affects both the investors and the founders’ ownership in the business.

When we say that share options or ownership have vested, this means that the owner now controls and can receive benefits attached to those shares. For new hires into a company, there will be a vesting schedule that determines when they actually take control of the shares that have been allocated to them through the employee options pool. This vesting schedule is generally over a year or three years and is designed to make sure that the employee stays at the company and continues to contribute to its success. If the employee leaves, generally any shares that have not yet vested go back into the employee options pool. In order to exercise these options, the holders will need to pay the, often nominal, amount of value assigned to them and trigger tax considerations. This means that often people wait to exercise options until they have significant value.

Funders investing in early-stage companies often ask founders to agree to a vesting schedule as well. This is called reverse vesting as the founders already own the shares. In this case, the funder is asking you to essentially reset the clock to zero as if you were a new employee and to agree that if you leave the company during the vesting schedule, you’ll only be able to keep the shares that have already vested. This should not affect your voting or control rights as a founder. As a founder you might find this a frustrating ask, but it is important to remember that the funder is essentially betting on you (and your co-founders) with their investment as your company may not have any real assets other than your brains, so they don’t want you to leave the company. Agreeing to a fair timeline for vesting of founder shares, can be an easy way to assure the funders that you plan to stick around and build this company. And it is important to note that your voting rights or control of the company aren’t impacted by your vesting schedule.

Finally, you need to define the conditions under which the board and/or the new shareholders can ask you, as a founder, to leave. In a "bad leaver" scenario, founders may be pushed out without any vested shares, and in some cases where things go really wrong, "bad leaver" or "grey leaver" are purely subjective.

As a founder of an early-stage business, one of the only real assets you will have is your intellectual property (IP). Funders may include a clause where you confirm that the company owns all relevant IP and that you have protected it or will work towards protecting it through a patent or trademark.

Essentially, the funder wants to be investing in the entity that owns the IP. IP can extend beyond things like software, or an actual design, process or methodology and can include the trade secrets of the business (customer and client lists) as well as the know-how of the employees. Often, a funder will want to check that the employment agreements of the company adequately ensure that IP created by employees is owned by the company.

Relatedly, some contracts may stipulate that the investment a funder is making means that they effectively own a specific piece of the IP or are entitled to a share of licensing agreements going forward. This could be the case in royalty agreements or convertible grant agreements. You’ll need to carefully think through what it means to allow a funder to have control or receive payments related to your IP in the future.

Some funders will have a clause in the contract that says that if you leave the company you are prohibited for a certain period of time against starting a related company. This is to protect the funder against you leaving and starting a business that is a direct competitor.

In this section of the term sheet, the amount the company is expected to pay as interest will be stated. For debt agreements, the interest will either be paid in cash at regular intervals or deferred until the maturity date. Deferred payments are also often called payment-in-kind (PIK). This means that instead of paying out cash to the funder, the interest is added onto the amount owed, so that the amount owed to the funder continues to grow over time. Accrued or PIK interest is commonplace in mezzanine debt agreements as fast growing businesses prefer to pay off the debt (and interest) at the latest possible point. It is also common in convertible debt agreements and recoverable grants.

Regardless of how interest is calculated or paid, as a founder you’ll want to make sure that this is affordable and in line with the risk that the funder is taking by lending you the money.

In this section of the term sheet, the amount the company is expected to pay as interest will be stated. For debt agreements, the interest will either be paid in cash at regular intervals or deferred until the maturity date. Deferred payments are also often called payment-in-kind (PIK). This means that instead of paying out cash to the funder, the interest is added onto the amount owed, so that the amount owed to the funder continues to grow over time. Accrued or PIK interest is commonplace in mezzanine debt agreements as fast growing businesses prefer to pay off the debt (and interest) at the latest possible point. It is also common in convertible debt agreements and recoverable grants.

Regardless of how interest is calculated or paid, as a founder you’ll want to make sure that this is affordable and in line with the risk that the funder is taking by lending you the money.

The repayment section outlines how much you owe in total, when you need to make repayments against the principal or total amount owed and how they are to be calculated. As a founder, you need to be comfortable with how much you need to repay and the timing of that repayment. The wording in this section of the document should be translated into your financial model and be in line with your future projections.

If you are planning to roll over a loan, i.e. take out the same loan again without having to repay it, you’ll need to factor in whether the funder will be in a position to “roll over” this loan.

For cross-border transactions, you’ll need to specify the currency that is being used for repayment. Additionally, if your country has foreign exchange controls, you will need to understand how this affects repayments.

For a redeemable equity agreement, this section will lay out when the shares that are being acquired in this agreement can be redeemed,for how much and when they can be redeemed.

This is the date that the total amount owed is expected to be paid back and/or shares redeemed. This should align with your business plan.

This clause stipulates whether or not a founder can pre-pay any of the total amount due. And if they do pre-pay if there is any discount on the total amount owed. If there is a strong possibility that you will want to replace the capital in an agreement with better or cheaper capital, you’ll want to negotiate a pre-payment clause. In order to do this effectively, you’ll want to understand the funders position around liquidity, i.e. would they be happy to get capital back early? Or have they built their own financial model based on having capital lent out or invested in companies? Understanding the impact it would have on them as a funder will help you be able to suggest terms that would work for both of you.

Unless there is a grace period, interest, dividends or profit share payments will be expected to start as soon as the agreement is signed. As a founder, it is completely within your right to ask for a grace period to allow your company to develop before agreeing to start disbursing cash to funders. This grace period might be time based, i.e. 6 months or 12 months, or might be until you achieve profitability or some other sort of financial milestone.

Some funders may ask for the founders to undertake a personal guarantee to secure the deal. This means that if the company is unable to repay the agreed amount, the founder(s) will have to repay personally - potentially by selling any assets that they own or by forfeiting their stake in the company, if they have used this as surety. Some funders see this as a necessary “skin in the game” agreement, but you’ll have to decide how comfortable you are putting your personal assets up to assure repayment. It can be important to get legal advice before you agree to sign a personal guarantee.

In any sort of loan contract, there will be a section that outlines where the loan sits in what is called the capital stack. The capital stack refers to all of the capital that has been put into the business and has any kind of ownership claim or right to be paid by the business. Another term for the capital stack is a waterfall, which is a great way to think about it. Money pours from the top of the waterfall and flows out the bottom. So if you sit higher up the capital stack (or waterfall), you will get paid first. If you sit further down the capital stack, you’ll get paid last. We call capital that sits at the top of the capital stack “senior” and capital that sits below that “subordinated”. Equity always sits at the bottom of the capital stack. The risk of potentially not getting paid increases as you move down the capital stack, and, generally, the amount investors want to be paid to bear that risk increases as you move down the capital stack.

Sometimes, funders use the term “pari passu” to describe the fact that their investment will rank equally with some other investments in the company. Pari passu is a Latin phrase that means “equal footing”. If this is the case, the investor is generally asking that payments made to all of the equal ranking investments be made on a pro rata basis. Pro rata is another Latin term that means proportional allocation. So in the event of a payment, all of the pari passu investors will receive payments in relation to their size and/or stake in the company.

There may be an origination fee as part of the agreement. This amount is paid up front, often as a percentage of the loan amount. As a founder, you have a right to understand what these fees are going towards and if they are fair and at market rates.

Another of the thorny issues of early-stage investing has to do with deal costs. In pre-seed and seed equity rounds and in grant funding most funders will cover a large portion of the deal costs, including due diligence and legal fees for closing costs, but later stage (post series A) equity funders might stipulate that the company should cover some portion of these costs. It is important to be realistic here when you are discussing the closing costs of the deal and how these will be split.

Finally, there might be terms around penalties. For instance, if a funder creates legal documentation that offers a deal on the same terms as the term sheet signed, but the company decides at the last minute not to take the deal for any reason, there may be penalties payable to claw back some of the funder's costs.

A liquidity event means cash coming into the business by having private investors put money into the company during a funding round or by taking the company public on a stock exchange during an IPO or the whole business or a significant part of the business being acquired by another company.

A change of control transaction is when a controlling share in the company is acquired by a third party i.e. more than 50% ownership. This might be a corporation or a financial buyer (like a private equity company) buying the company or a merger with another company. As opposed to a liquidity event where the founders retain control, a change of control means that the direction of the company may be significantly altered. Most funders will ask for some sort of prior notification of this occurring and will likely ask that they have the option to have their stake purchased or their loan be paid back at this point. This is entirely reasonable as early-stage funders have made the funding commitment to the founding team and if a new entity buys controlling ownership in the company, then they want assurance that they can exit the investment.

In the event of a conversion of debt to equity that is triggered by a financing round, the funder might ask for a discount to be applied. This means that the funder will get to buy the shares at a cheaper price than the new investors. For funders, the rationale for this discount is that they took additional risk in funding the company early and should get more shares for their money.

In a SAFE, this early investment bonus can be achieved through a discount and/or through a valuation cap that effectively caps the price that an investor will pay for the shares when they are purchased.

When negotiating any kind of discount to the later conversion price, you’ll need to take into account what is fair to the funder for the extra risk they are taking on by investing early. You’ll also need to consider what future investors will see as fair. If you agree to a very high discount, then the original investors could take a large stake in the company at the next funding round and this might reduce your own ownership stake significantly and potentially scare off other investors.

A warrant is an option for a funder to purchase additional shares of the company at a later point. Warrants are primarily used by mezzanine debt providers to allow them to purchase shares in a company if it starts to become very successful. In this way, it allows a debt holder to have some upside in a similar way that a convertibility option does. If you are negotiating warrants, you’ll want to think about many of the same considerations of convertibility: when can the warrant option be exercised, at what price and how will this option affect future funding rounds? Although they can be a useful way to create some upside for funders, one of the main issues with warrants is that they can make your capitalization table a bit complicated.

In the event that you raise an additional round of funding, some funders might request the opportunity to participate in that next round alongside other funders. This is called a participation clause or a follow-on clause. This clause may stipulate the total amount that funders can buy or may simply say that they have a right to participate in a future round. Often funders stipulate that they can participate at least pro rata to their current ownership. As a funder, you should welcome this clause because it means that the funder wants to make sure they have the opportunity to continue funding you. This continued participation will be seen positively by potential investors.

The only downside here for a founder would be if you are precluded from accepting money from more strategic investors in follow-on rounds in order to allow previous investors to participate. One option is to agree to participation only for significant investors.

A right of first refusal (ROFR) is a bit stronger than a participation clause and requires that funders have the first option to buy any shares issued to third parties outside the company. Depending on how this is worded, this can be problematic for future investors as it means that the current investors may be able to take up an entire round and exclude any new investors. It is worth questioning why an investor would need a ROFR instead of a participation clause.

Although not as common in early-stage term sheets, the funder might request tag along rights. This means that if another shareholder finds a buyer for their shares, the funder can “tag along” and sell their shares as well. This is requested because the funder has invested in you as an entrepreneur and if there is a change in who is captaining the ship, the funder may want an out too. The tag-along often goes hand in hand with a drag-along (see below) which is favourable to the founders.

A drag along clause allows a majority of shareholders, including the founder, to push the sale of the business, or at least a portion of the business, and to “drag along” other funders in this sale. The idea is that this benefits both founders and funders because it sweeps up smaller holders who may not be aligned with the founders and investors.

If you raise additional rounds of equity capital as a company, everyone who owns shares in your company will have their ownership diluted. This is par for the course in equity investing as you all will own slightly less in a larger company. But, if you raise an equity round at a cheaper price than the last round, then your current shareholders will be significantly diluted and will now own less in a smaller company. This is called a down round and is obviously not ideal. Most equity investors will want to include a clause to protect themselves if that happens.

There are two ways to go about this. There is a weighted average clause that says that if you raise a down round, the company will issue additional shares to the funder to make sure they maintain their current ownership. Another way is to use a full ratchet. This is extremely unfriendly to the founders as it requires them to take some of their own shares and transfer them to the other shareholders to make sure they maintain their current level of ownership after a down round. I would suggest that you not sign a term sheet that includes a full ratchet. If you do see one proposed, this should tell you something about the overall nature of the term sheet with regard to its friendliness to the founders.

Covenants are the rules that the company needs to play by to stay in good standing with the funders. There are two types of future covenants: affirmative covenants that promise your company will do certain things and restrictive covenants where you promise not to do certain things. Affirmative covenants may include a minimum amount of cash kept on hand, having business insurance, staying current on your tax liabilities or making additional loans subordinate to the funders’. Negative covenants may include limiting the amount of debt the company can incur, paying out dividends, changing management, selling assets or lending against the same collateral. Additionally, you may also have positive or negative financial covenants such as capital covenants that specify financial ratios you must maintain such as liquidity ratios, debt-to-equity ratios or debt service coverage ratios, or performance covenants based on your business plan such as a minimum amount of revenue or user growth.

For many debt funders, covenants are an essential part of a loan agreement. As a founder it is important that you examine the covenants closely to understand how they will affect your business plans. If you violate one or more of these covenants, you are in technical default on the loan. While this means that the funder has the right to require you to repay the funding, if you have a good relationship with the funder you should be able to come back to the negotiating table to find a way forward that works for both of you. We saw an example of this in Chapter 9, where Antonio went back to Erik and Rodrigo at Adobe after breaking the performance covenants and being unable to pay the percentage of revenue they owed them. Eventually, Provive and Adobe were able to modify the existing loan conditions to make them work for Provive going forward. On the other hand, if everything with the business has gone well, you may also be in a position to go back to the funder to have some of the covenants relaxed to give you a bit more flexibility.

I have two key pieces of advice here. Firstly, negotiate realistic covenants upfront that make sense for your business going forward and that also give the funder reassurances around the direction of the company and the safety of their capital. Secondly, as much as possible, make sure the funder sees you as a partner and is invested in the success of your business. That way, if there are renegotiations or leniency provisions that are needed to continue the growth of the company, they will be willing to come to the table and find a way forward that works for both of you.

In this section, funders will lay out the circumstances that would result in the company defaulting on the agreement. These could include many things: breaking covenants, not making payments as required, using the cash for something other than the use of proceeds, insolvency etc. Similar to the covenant discussion above, it is important that you evaluate the restrictiveness of this clause.

If a company’s assets are sold, either during a bankruptcy or in a merger8, the first people paid out will be the creditors (lenders). After that, the rest of the shareholders will be paid. The liquidation preference allows funders to stipulate how much money they would receive in this situation before the owners of ordinary shares are paid. This amount is generally stated as a multiple of the money the investor has put in. If an investor stipulates a 1.5x liquidation preference, they are requesting that they receive 1.5x the capital they put in back before anyone below them in the capital stack is paid.

As a founder, this is a great place to skip down to when you are reading a term sheet to see how founder friendly/downside focused the investor is. If you see a high multiple here, then the funder is potentially looking to make their return at the expense of other shareholders in the company if things don’t work out as planned.

While I’ve found this to be true for equity investors, it is a bit more complex for structured exit funders. Structured exit funders are not looking for the massive upside that equity funders are, so they are rightfully focused on recovering their principal for as many investments as possible to make their portfolios work. So in a structured exit agreement, you might see a liquidation preference that includes the entire amount owed, including interest. This is understandable, but should still be a topic of discussion during the negotiation.

For any cross border transactions, the term sheet will need to establish the country of governing law. This is the law by which any disputes about the contract will be settled. Funders often prefer to choose a jurisdiction they are comfortable with, like their own or a “trusted” jurisdiction like the UK, Hong Kong, Singapore or U.S. rather than the jurisdiction of the founder if they feel there are not enough legal precedents or protections available to them. For founders, in most cases it can be simplest if the governing law is the local law. Otherwise, there might be conflicts between the contract’s governing law and local company law.

In most early-stage businesses, the founder is the most important part of the business. If something were to happen to them, the business could potentially cease to exist. Thus, many funders require there be an insurance policy taken out against the life of the person or persons who founded the company, so there would be a payment to the business, if something were to happen to the founder(s).

Funders sometimes ask companies to issue an assurance that they will not be held liable for any damages that are incurred by the company. They might also request that you indemnify board members.

Generally this clause is tied to damages that occur due to a breach of covenants. If it is too open- ended, it can be dangerous for founders. An investor is investing into a company and with that comes risk, but funds shouldn't be saddled with damages that might have been linked to a pre- investment liability which wasn't disclosed, or where the founders or company breach(es) a covenant where they shouldn't have. There should be a limit on the extent of this indemnity, such as capping at the investment amount and no more. There should also be a time based limitation.

Whether or not a funder wants to sit on your board will depend on what type of investor they are and how much money they have put into your company. If they are a hands-on equity or structured exit investor with a sizable amount of capital at risk, they will likely request a board seat. In contrast, if they are a funder who is taking a very small stake or who is lending or granting money to the company, they will not. Having experienced board members can be a huge advantage to a small company and the ability of a funder to offer this support should be one of the factors to consider when you are looking for funding. If you need mentorship and guidance, having a strong board that is invested, literally and figuratively, in your success, can be paramount. Some funders might be more inclined to be a board observer than a board member. This can be a great way to involve smaller funders.

When you are thinking of board composition, smaller is generally better from a logistics perspective. Stacking your board with a lot of luminaries is a great way to show that you have a lot of potential, but if it takes you months to organize a call to suit everyone’s schedules, then you will likely not have the timely input that you need to run the company.

Protective provisions are one of the special rights negotiated by investors participating in a company’s preferred stock financing. Protective provisions give preferred stockholders in a company consent rights with respect to key corporate actions the company seeks to take. The company will typically outline its protective provisions for investors in a series of clauses in its charter, which is the company’s central governing document. Examples of commonly negotiated protective provisions held by preferred stockholders include consent rights concerning the company’s ability to approve:

• amending its charter;
• creating a new class or series of capital stock, in particular when such a new class or series ranks senior to, or on parity with, the existing preferred stock in liquidation preference, payment of dividends and redemption rights;
• incurring debt outside the ordinary course of business;
• a merger or sale of substantially all of the assets of the company;
• or increasing or decreasing the size of the board of directors.

This clause stipulates what type of information or reporting the funder expects from the founder. This can include financial information, business plans and impact data. You’ll need to come to an agreement with the funder that provides them with reasonable visibility over how the company is operating on a regular basis, but doesn’t require the company to spend significant additional time creating funder specific reports that are not useful to the running of the business.

This section is often shortened to reps and warranties and it essentially means that everything you’ve told the investor during diligence is true. In other words, you are promising that certain things have or haven't happened previously, or do not exist at the moment. This is subject to disclosure, which means that if you’ve been totally transparent and have disclosed all issues, then you cannot be sued. This protects the investor from some skeleton in the closet coming out which they may not know about or it protects the investor from suffering loss as a result of some undisclosed liability.

A big thing here will be personal sureties or guarantees from the founders. Funders want to know that the founders will stand behind the promises they make about their business and are incentivised to disclose everything relevant. Often funders will just state that “standard representations and warranties apply”.

If this is not the case, the scope of the reps and warranties and due disclosures are important. Founders should look to limit their reps and warranties in time and scope, while funders will generally seek to have these as broad as possible.

Alternative dispute resolution should be favoured by all parties to resolve disputes. Preferably mediation first (cheap and quick) before arbitration which is just like a trial in court (but run privately). It can be expensive. For founders, with not much cash to throw at litigation, a mediation process is recommended. Also, if there might be any disputes about a financial target being met, it is worth agreeing on an independent third party accountant to act as an expert and decide on the dispute for you. (Juliette Thirsk, Brevity Law)

The funder might request that you keep this agreement confidential. This is pretty standard and shouldn’t pose too much of an issue for you.

The funder might also ask for a period of exclusivity where you are not allowed to speak with other funders. If you are close to signing a deal and the funder wants this period to finalize their due diligence, this is understandable. If you feel the funder is using this clause to stop you from testing the market to see if you could get a better deal, then you might want to reconsider signing this agreement. Regardless, you should always look to restrict the exclusivity (also called a “no shop” clause) to a certain time period i.e. 30-60 days.

As we discussed in the beginning, a term sheet is not a legal agreement. So after you have signed this document, lawyers will need to draw up the legal agreements for the deal. The funder can specify here any additional conditions that must be met before you execute the legal agreements and officially close the deal. These may include additional due diligence, seeking investment committee approval and/or any additional negotiations relating to the legal agreements.