The Term Sheet in the fund-raising process

Your start-up’s pitch deck and business plan
start-up
ready and up to date? Your investor meeting went well, and you will shortly receive a
term sheet
? Also known as a letter of intent, this is one of the first documents signed when raising funds. It contains a summary of the main legal and financial terms of theinvestment. What clauses should it include? What are the legal issues involved? We’ll help you make sense of it all, and secure your operations!

What clauses should the Term Sheet contain?

What is the purpose of the term sheet? Summarize in writing the main terms and conditions of the agreement you are potentially going to conclude with the investor, through various clauses:

Clauses in the investment agreement and shareholders’ agreement

The letter of intent contains the terms and conditions of the future investment agreement:

• the identity of the parties ;
• the amount of the planned investment, and the valuation of the start-up before the operation;
• terms of equity investment (cash or in-kind, etc.).

The main terms and conditions of the future shareholders ‘ agreement must also be included:

• a list of important decisions for which the prior agreement and/or consultation of the investor will be mandatory;
• supervision of share transfers (pre-emptive rights, lock-up clauses, etc.);
• financial provisions relating to profit sharing;
• exit clauses governing the early departure of shareholders ;
• corporate governance provisions (composition of the Board of Directors, appointment of the Chairman and Chief Executive Officer, etc.).

To find out more, read our article on the founding partners’ agreement.

Obligations of the parties to the fund-raising agreement

The document sets out the obligations of each party within the framework of the fundraising, namely the clauses :

• confidentiality (prohibiting disclosure to third parties of the contents of the term sheet and the progress of negotiations);
• information (your company undertakes to provide the investor with all information required to complete the investment project);
• the conditions required to bring the investment project to fruition (legal and financial audits, regulatory approvals, etc.);
• the exclusivity clause (prohibiting any negotiation or conclusion with another person, and any act that may hinder the completion of the transaction).

In practice, the letter of intent will also contain a provisional timetable for the various stages.

What are the legal issues involved in Term Sheet?

The wording of the letter of intent is relatively free. The parties can therefore formalize it themselves, on the basis of aterm sheet template, for example. In practice, it will usually be the equity investor who sends this document to your start-up. But it is wiser to have it drawn up by lawyers, who will assess whether it is more or less binding.

The good thing about this is that it shows you what you already agree on. You can insert specific clauses(confidentiality clause, etc.), and define the points to be negotiated later with the investor.

In principle, the letter of intent has no contractual value, and is therefore not binding (
non-binding term sheet
). Why is this an advantage? This is because it allows you to demonstrate your mutual willingness to raise funds, without committing to a contract. This is possible, provided that the non-binding nature of the document is clearly stated. So be careful to avoid, for example, inserting overly precise performance conditions.

Successfully negotiating your term sheet as part of the fund-raising process is essential. This document is part of the investment documentation, so it’s a good idea to train yourself to understand its key terms.

If you’d like us to help you negotiate your term sheet, or if you have any questions after reading this article, don’t hesitate to sign up for our training course on raising funds in France.