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Term sheets and contract negotiations with investors: key steps to financing your start-up

If you are looking for investors for your start-up, the contract negotiation phase and the creation of a term sheet is a crucial step on the road to funding. In this article, we will look at the importance of term sheets and the key steps in negotiating contracts with investors.

What is a term sheet?

A term sheet is a document that sets out the key terms and conditions of the proposed investment. It is a preliminary document that provides the framework for future negotiations and the final investment agreement. A term sheet is usually not legally binding, but contains key agreements that will later be included in the final contract.

Key clauses in a term sheet:

Investment amount: The term sheet should specify the amount of the investment and the type of financing (equity, debt, convertible bonds, etc.)

Valuation: The valuation of the company before and after the investment is an important point. It determines how much of a share in your company the investors receive.

Participation rights: The term sheet can also define investors' participation rights, such as preference shares or voting rights.

Dilution protection: Investors can request protective clauses to ensure that their participation is not diluted by subsequent financing rounds or capital increases.

Exit terms: The term sheet may include exit conditions such as an exit strategy, a sale clause or an IPO clause.

Dividends: It may also specify dividend policy and payments.

Rights and obligations: The term sheet should clearly set out the rights and obligations of investors and the company, including information on governance and the role of investors in the company.

Steps in contract negotiations with investors:

Offer and counteroffer: Start the negotiations with an offer that contains the most important conditions. Expect counter-offers from the investors and be prepared to work out the terms.

Professional advice: It is advisable to consult legal and financial experts to ensure that your interests are protected and that you understand the implications of the agreements.

Due diligence: Investors will usually carry out extensive due diligence to review your business and finances. Be prepared for this process and make sure all documentation is in order.

Signing of the term sheet: Once negotiations are complete, the term sheet is signed by both parties. Note that this is not the final investment agreement.

Drafting the investment agreement: After the term sheet is signed, the lawyers on both sides work to draft the final investment agreement. This should include all the terms and conditions from the term sheet.

Closing the transaction: Once the investment agreement has been signed, the actual investment transaction takes place, where the investment sum is transferred and the agreed shares are issued.

Term sheets and contract negotiations with investors are complex processes that require careful planning, negotiation skills and professional support. It is important to carefully review the terms and ensure that they support your company's long-term goals. A successful contract negotiation can not only secure the necessary funding, but also lay the foundation for a successful partnership with your investors.