The term sheet indicates that the two parties have reached an agreement on the terms of the deal. continue reading to know more
Respond to a Term Sheet: When you receive a term sheet from a company to open a new business venture, the two parties have come to an agreement on the material terms of the deal. This could be the launch of your company or the signing of an initial lease for your new office space. So what should you do next? Vakilsearch will tell you how you can successfully close negotiations after receiving a term sheet.
Term sheets usually come from VCs after several weeks of work and are often accompanied by understandable elation. In contrast, signing a term sheet for a ‘priced round’ is a much bigger commitment than signing a safe/convertible note. As a result, you need to follow the right steps in order to secure the best deal for your company. Below are the steps you need to take after receiving a term sheet.
Get to Know the Company
Once you’ve gotten to know the company, it’s time to start meeting with key people in charge of the deal. This is because once you sign a contract with a company, you’ll likely need to work with them on a daily basis. So, it’s crucial that you get to know the people in charge of the deal, including the chief financial officer, the chief operating officer, and the chief marketing officer.
It would be best if you also met with representatives from the company’s operations and HR department to get to know its culture in more detail. You should also get to know the people who work in the company’s offices, including the employees on staff and the contractors who work for the company.
Inform Other Potential Investors
What: Inform all other potential lead investors in your fundraising pipeline that you have a term sheet but would like to complete the conversation with them. You want to do enough meetings for them to make a decision. Most investors will likely say ‘no’ quickly. Meanwhile, investors who are interested will want fast turnarounds on material requests. After-hours meetings will have a realistic chance of achieving a ‘Yes’ within a reasonable period of time.
Why: If you have more than one party interested, negotiating a term sheet will be much easier. If you submit two or more term sheets, you will have a better chance of getting your preferred terms and a backup plan if your first choice backs out.
When: You should sign the term sheet within 24 hours if you are likely to do so. Otherwise, wait, as most investors will say ‘no’ at this point.
Check Investor References
What: You should ask the VC who gave you a term sheet for references. At least one of their portfolio companies should be able to provide references. Go through their companies and search startup news sites to find off-book references that the VC hasn’t prepared before your reference calls. Pay attention to the VC’s behaviour in stressful situations, such as when you’re fundraising, discussing M&A(mergers and acquisitions), or running low on cash.
Why: Being on the Board of Directors of a venture capital company is like being married without the option of divorce. You need to know the reality of working with this person before agreeing to anything.
When: Within 24 hours, you can contact off-book references. Please wait until you have negotiated the main terms with the VC before asking them for their pre-selected references. This could impact negotiations and delay the completion of the conversation with others.
| A term sheet is a major milestone for most startups. Ensure you land a great deal for your company by moving quickly to the closing items. |
Consult Your Lawyer & Advisors
What: Send the term sheet to both your lawyer and trusted advisors (existing investors, mentors, and experienced founders who have experience with term sheets). Ask if any of the terms are unusual or concerning and their overall opinion on the deal.
Why: In general, founders have seen fewer term sheets than lawyers and advisors, so it’s key to understand the legality of the terms. The four most important items within term sheets, outside of price and investment amount, are board control, Board approvals (budget, hiring, etc.), equity preference stack, and employee stock option pool.
When: Please do this within 24 hours of receiving the term sheet to receive a response within three days.
What is Vakilsearch trying to tell you? Why are we bringing you this article?
We work with the most qualified attorneys. We brainstorm with you and collect all the info we need. On our forum, you can see the progress of your work done by our experts. We’ll break down all that legal jargon for you and be your best man. Just click here to Respond to a Term Sheet.
Wrapping Up – Should You Accept the Term sheet?
After you’ve gotten to know a company and signed a contract with them, the next step is to accept the term sheet. This means that you have reached an agreement on the terms of the deal and have officially committed to the company. Once you sign the term sheet, it means that the two parties have come to an agreement on the terms of the deal.
This could be the launch of your company or the signing of an initial lease for your new office space. So, what to do next? Keep in mind that once you receive a term sheet from a company, it could be the start of a long and fruitful partnership. So, don’t just accept the response term sheet as is. Instead, use the term sheet as a guide and work to agree as favorable as possible for your company.
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