How to Negotiate Your Term Sheet Under French Law?

Your startup's pitch deck and business plan are ready and up to date? Your investor meeting went well, and you are about to receive a term sheet? Also known as a letter of intent, this is one of the first documents signed as part of a fundraising round. It contains a summary of the main legal and financial terms of the investment. What clauses should it include? What are the legal stakes? We help you see things more clearly, so you can secure your transaction.

What clauses should a Term Sheet include?

What is the purpose of the term sheet? To set out in writing the main terms of the agreement you will potentially enter into with the investor, through various clauses.

Clauses on the investment agreement and the shareholders' agreement

The letter of intent sets out the terms under which investors will enter your share capital, which will be finalised in the corporate documentation and the shareholders' agreement.

• identity of the parties;
• the intended investment amount;
• the startup's pre-money and post-money valuation;
• the terms of the equity stake;
• the minimum and/or maximum duration of negotiations;
• whether the letter of intent is binding or non-binding;
• a confidentiality clause;
• the applicable law and competent court;
• a cap table before and after the transaction.

The main terms and conditions of the future shareholders' agreement must also be included.

• the list of reserved matters;
• restrictions on the transfer of shares;
• financial provisions relating to profit sharing;
• exit clauses;
• governance provisions;
• investors' preferential rights;
• founders' commitments;
• intellectual property clauses;
• non-competition and non-solicitation clauses.

For further reading, see our article on the founders' shareholders' agreement.

Obligations of the parties in the context of the fundraising round

The document sets out each party's obligations in the context of the fundraising round.

• confidentiality clauses;
• information clauses;
• conditions required to complete the transaction;
• exclusivity clause;
• provisional timetable for each stage.

What are the implications for key personnel?

The investor may negotiate the retention, departure, or modification of employment terms for certain members of your startup's staff.

In practice, professional investors often put in place incentive mechanisms (management packages) for key personnel to encourage greater commitment to the startup.

Who signs the Term Sheet?

The Term Sheet must be signed by the company and, where applicable, by its main shareholders.

In practice, the term sheet is signed by:

• the corporate officer (mandataire social);
• the founders;
• existing investors;
• incoming investors.

What are the legal stakes of the Term Sheet?

The drafting of the letter of intent is relatively flexible. The parties may therefore draw it up themselves on the basis of a template.

In practice, it will generally be the venture capital investor who sends this document to your startup.

However, it is advisable to have it drafted or reviewed by lawyers, who will assess the extent to which it is binding.

The value of this document is that it records the points on which you have already reached agreement.

In principle, the letter of intent has no contractual force and is therefore not binding (non-binding term sheet).

This non-binding nature must nonetheless be clearly stated in the document.

What precautions should you take to protect your liability?

In principle, the parties to the Term Sheet are free to walk away from negotiations without incurring liability.

However, the parties must ensure they do not break off negotiations in an abusive manner.

Exchanges taking place in the context of a Term Sheet are subject to Article 1112 of the French Civil Code, which provides that the conduct and breakdown of pre-contractual negotiations must comply with the requirements of good faith.

In what circumstances can you incur liability?

If you initiate or continue negotiations without any genuine intention of concluding the contract, you may be held liable.

Courts consider there to be an abuse where the breakdown is driven by an intention to cause harm, or where a party acts with culpable recklessness.

Where discussions are still at an early stage, the parties may bring them to an end without having to justify a legitimate reason.

However, where negotiations are at an advanced stage, the party that ends them must be able to justify a legitimate reason for doing so.

What are the risks involved?

The remedy takes the form of damages.

Only losses actually suffered — such as audit fees, expert fees, or legal costs — give rise to compensation.

Loss of profit, and in particular the loss of a chance to conclude the contract, cannot on the other hand be the subject of a compensation claim.

Successfully negotiating your term sheet in the fundraising process is essential.

This document forms part of the investment documentation; it is therefore important to build your understanding of its key terms.

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