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Investment Deals - The Value of an Investment Term Sheet

on Saturday, 01 January 2022.

A question we are often asked is whether an investment term sheet is necessary? Would it not be quicker and cheaper to bypass the term sheet stage and instead move straight to the negotiation of the actual investment documents?

The short answer is "no" - a term sheet is not necessary. However, a good term sheet is, in our view, an important first step - particularly if the investor (or syndicate) includes a VC. It is even more important if the investor is a VC that isn’t investing under SEIS or EIS because non-S/EIS investors will often seek more onerous rights and protections - many of which are not available to S/EIS investors.

A good term sheet should confirm:

  • how much is being invested and the valuation (including whether the valuation is 'pre-money' or 'post-money' - an important distinction)
  • the class of share that the investor will receive (this will be ordinary shares for S/EIS investors, but a non-S/EIS investor may well seek a separate class of share which provides preferential rights over other shareholders)
  • where the investor is seeking preference rights, a summary of the rights they are seeking - this might include a preferential return on capital in the event of liquidation or exit, a preference dividend, a right to appoint a director (sometimes linked to that investor holding a certain percentage of shares) and, for non-S/EIS investors, an anti-dilution right (entitling the investor to be issued with free shares if the company subsequently raises funds at a lower valuation)
  • what matters the investor will expect the company and founders to warrant as being true and accurate and, ideally, what limitations of liability will apply (eg length of the warranty period and cash limits on the liability of the company and founders)
  • if the founders are to be subject to 'leaver' terms (ie terms requiring them to give up some or all of their shares if they cease to be involved in the company), an outline of the terms including, ideally, details of any reverse-vesting mechanism
  • what investor vetoes the investor will be seeking including, ideally, the schedule of proposed consent matters
  • any conditions to completion of the investment.

The term sheet becomes even more important if you are in the fortunate position of comparing competing offers, or if you are introducing both S/EIS and non-EIS investors.

For specialist legal advice on securing investment for your business, please contact Nathan Guest in our Technology team on 07795 271513, or complete the form below.

This article was originally published by Business Leader.

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