Key points
- The term sheet sets out the initial financing terms between a company and its investors, and forms the basis for negotiation.
- In principle, it does not oblige the parties to complete the deal, but it steers discussions towards the final agreement and may contain binding clauses (exclusivity, confidentiality).
- Its key elements are the pre-money valuation, the investment amount, the type of shares issued and the investors’ rights.
- The post-money valuation equals the pre-money valuation plus the new investment (example: €10m + €2m = €12m).
- Preference shares often carry advantages: priority dividends, enhanced liquidation rights or specific voting rights.
The term sheet, a key document in the fundraising process, serves as the basis for discussions between investors and companies to set out the terms of a future contract. In principle it is not binding as to the completion of the deal, but it steers the negotiations towards a final agreement. Involving a fundraising lawyer becomes crucial to balance the interests at stake effectively and to ensure precise drafting of the term sheet. It typically includes details such as the pre-money valuation, the investment amount, the type of shares issued and the investors’ rights. Negotiations on the term sheet call for close attention to technical and financial details, which affect not only the amounts and shareholdings but also future governance. Preparing each step carefully, from the preliminary audit to engaging competent advisers, maximises the chances of a successful funding round while presenting the company convincingly to potential investors.
What is a term sheet?
A term sheet is a document describing the terms and conditions that will be incorporated into a future final contract. When a company starts raising funds, this document sets out the main terms of the financing proposed by the investor. In principle, it does not oblige the parties to complete the deal: it serves as a basis for discussion to finalise the details before final signing. Negotiations must nevertheless be conducted in good faith (Article 1112 of the French Civil Code (Code civil) (in French)), and certain clauses (exclusivity, confidentiality) may bind the parties.
For any company seeking capital, working with a fundraising lawyer can greatly ease the preparation of a sound and balanced term sheet.
Key elements of a term sheet
Several elements are essential in an effective term sheet. Here are the main ones:
- Pre-money valuation: An estimate of the company’s value before the new investment.
- Investment amount: The exact sum the investors commit to inject into the company.
- Type of shares issued: The different classes of shares (ordinary, preference, etc.) the investor will receive.
- Investors’ rights: Includes voting rights, information rights and other specific terms.
- Conditions precedent: The events or actions that must take place before the deal is finalised, such as financial or legal audits.
Pre-money and post-money valuation
The pre-money valuation is the value of the company before the new capital injection. A well-established valuation makes it possible to determine the share of the company held by the new investors after the investment. For example, if a startup is worth €10 million before raising €2 million, the post-money valuation will be €12 million.
Types of shares
Preference shares (actions de préférence) often carry additional advantages compared with ordinary shares. They may confer specific rights of any kind (Article L. 228-11 of the French Commercial Code (Code de commerce) (in French)), such as priority dividends, enhanced liquidation rights or even greater voting power at general meetings. An investor may insist on several classes of preference shares depending on its appetite for risk and its expectations of the startup.
Negotiating the term sheet
Negotiating a term sheet proves complex. Many technical and financial aspects come into play. Each party tries to obtain the most favourable terms while keeping a partnership that benefits everyone. These discussions cover not only the amounts invested and the respective shareholdings but also the legal aspects, future governance and the performance thresholds to be met.
What is at stake in the negotiation
Several elements must be taken into account during the negotiation:
- A realistic valuation of the company: Keep the valuation in line with the market.
- Aligning the stakeholders’ objectives: Make sure the founders and the investors share similar goals.
- Preserving decision-making autonomy: Make sure the terms let the directors keep a degree of strategic room for manoeuvre.
Impact of specific clauses
Some clauses in a term sheet can have a significant effect on the company’s future. For example, anti-dilution ratchet clauses protect investors by adjusting their stake if new shares are issued at a lower price. Minority protection clauses may provide for veto rights over certain major decisions. These elements must be studied carefully to avoid unwanted long-term consequences.
Preparing carefully for a successful funding round
Before drafting and negotiating a term sheet, a company must prepare thoroughly. Good preparation not only increases the chances of success but also shows investors the founders’ seriousness and competence.
The preliminary audit
A full audit of the company is essential. This audit covers the financial statements, future projections, existing contracts and all legal obligations. Having accurate, up-to-date documents makes it easier to produce a comprehensive term sheet and reduces potential uncertainty during the negotiations.
Building a convincing business plan
Presenting a detailed business plan helps convince investors of the company’s viability and growth potential. This business plan must cover every operational aspect: marketing, sales, product development, finance, human resources, etc.
Engaging the right advisers
Surrounding yourself with competent advisers is fundamental. Lawyers, chartered accountants and strategy consultants each play a role in structuring the offer and presenting it to investors. Their expertise contributes to negotiating balanced terms for your company.
Anticipating objections
Make sure you anticipate every possible question or objection from investors. Prepare clear and solid answers to common concerns such as competition, barriers to entry, optimistic financial projections, or innovative but unproven revenue models.
For assistance: term sheet lawyer.
