Term sheets are essential for any business that is about to engage in financing with investors, or enter into a merger or acquisition. However, just signing a term sheet provided by the other party, or engaging in term sheet negotiations without professional guidance can expose your business to unknown threats. That’s why it’s vital to work with a term sheet negotiations attorney like Paul Spitz from Kinetic Law, a Cincinnati-based startup law firm, who can help protect your deal against unforeseen legal bombshells.
Partnering with an attorney during the term sheet negotiation process will help you as you work towards closing your financing or M&A transaction.
What is a Term Sheet Negotiations Attorney?
A term sheet, also known as a letter of intent (LOI) or memorandum of understanding (MOU), acts as a blueprint for the final agreement between two parties, and generally accompanies large deals such as mergers and acquisitions or financings. It outlines the key points each party wants to include in the deal before it becomes legally binding. Even though this term sheet document isn’t typically legally binding, it irons out the key points that must be negotiated before the final documents are executed, and makes it harder for the parties to deviate from the terms outlined in the term sheet.
A term sheet negotiations attorney helps you create favorable terms for your business while identifying blind spots that can leave your business vulnerable to risks. They can help business owners understand complex terms that they may not be familiar with, as well as identify terms that are outside of the norm. They can also suggest additional terms to protect the client’s interest. By proactively pinpointing potential red flags early in the negotiation process, the founder has time to negotiate with the investors or other parties to ensure the terms are agreeable.
For example, founders may try to save money by using a model term sheet that is available to the public online for free. This term sheet may have been drafted by an organization representing investors, however, and may favor such investors. Thus, once the final documents are being drafted, the founders may struggle to find more favorable terms, even if they hire an attorney after the fact.
Paul Spitz, founder of Kinetic Law, is a zealous term sheet negotiations attorney who can help you avoid these situations. This way, you can protect your interest as you enter into a financing or M&A transaction.
What Are Some Typical Provisions in a Financing Term Sheet?
Startup founders often encounter a venture capital term sheet when raising money for their business. There are many key points that are presented and discussed before signing on the dotted line. Here are a few examples of provisions usually included in a venture capital term sheet.
- Anti-Dilution. Investors may want protection against dilution of their interests in future funding rounds. Depending on the structure and size of the deal, anti-dilution may not be a common deal term. In addition, there are certain types of anti-dilution protection, such as “full ratchet,” which are extremely rare and almost always unacceptable deal-killers.
- Co-Sale Rights. This gives the investor the right to sell its shares alongside a founder that wants to sell some stock, reducing the founder’s ability to sell as much stock, and receive as much cash, as originally desired.
- Participation Rights. Startups often need additional funding rounds to enable growth and expansion of the business. Participation rights allow the investor to invest more money in such future rounds, to maintain their ownership stake. This is often not a problem, but there is a risk if a problematic investor wants to exercise these rights.
Confusing, right? Some of these provisions can make your head spin if you don’t know what you’re looking at. That’s why it’s crucial to work with a startup and term sheet negotiations attorney that can help you understand each key point and how it will impact your business. Professional support and guidance are critical when creating a fair deal with which all parties can get on board.
Is a Term Sheet Legally Binding?
Generally speaking, term sheets are not legally binding, and most well-written term sheets will say so (with exceptions for terms like confidentiality). This allows each party to walk away if they are not pleased with the terms of the contract. However, the term sheet can be legally binding under certain jurisdictions requiring all parties to act in good faith.
How Long Can Term Sheet Negotiations Last?
Anywhere from 1 to 2 weeks, for a simple deal with reasonable parties, to between 4 to 5 weeks for more complex deals. However, negotiations may drag on longer without an attorney’s proper guidance, which can waste more of your time and money.
Partnering with a knowledgeable term sheet negotiations attorney can make negotiations and the process more efficient and timelier.
Do I Need a Term Sheet Negotiations Attorney?
Term sheets can be essential for financings, mergers, and acquisitions. They help you decide early on if entering into a transaction with another party is mutually beneficial, and you can agree on the necessary provisions before finalizing the contract. Unfortunately, more often than not, entrepreneurs underestimate the consequence of a poorly drafted term sheet and find themselves in hot water.
A terms sheet negotiations attorney can weed out, resolve, and negotiate the most important issues so you can proceed with the deal on stronger footing.
As an experienced startup attorney, we know firsthand the challenges and risks startups face. And, like you, we run our business efficiently, enabling us to charge less than big firms, solve problems faster, and put your needs first.
What Services Does Kinetic Law Offer?
Kinetic Law is well-versed in the needs of founders and entrepreneurs. So, whether you’re launching the next big insurtech platform or creating a branding firm, we have services that can help. In addition to drafting and negotiating term sheets, we can aid in protecting you and your company’s assets with our other service offerings.
Delaware incorporation. A standard step for many startups is establishing a foundation with a Delaware incorporation. A solid foundation provides you with a host of financial and business advantages. We help you with this task by:
- Delaware Certificate of Incorporation preparation and filing
- Post-incorporation document preparation
- Assignment of intellectual property
- Founder stock agreements
- Establishment of stock option plans
Equity and debt financing. Most startups rely on outside investments to grow their business. But, unfortunately, stringent laws can constrain your ability to procure funding. Kinetic Law will help you navigate the legal maze and set your business on the right path. As such, we provide the following services:
- Private placement structure
- Debt and equity financing counseling
- Seed and angel rounds (SAFEs and convertible notes)
- Venture capital rounds (preferred stock)
- Securities law compliance
Small Business Services
Formation and governance. Organizing your business to alleviate taxation, risks, and stock offering legislation concerns is advantageous. We offer assistance with starting your business on solid footing and following the law through:
- State documentation filing
- Entity formation and operation
- LLC Operating and shareholder agreements
Contract drafting and negotiations. Signing a contract is a sensible move only if you recognize the risks. To help you avoid financial and legal damages, we prepare contracts and will advocate on your behalf. You’ll be able to make well-advised commitments through:
- Contracts for buying and selling businesses
- Negotiating commercial leases
- Master services agreements
- Various commercial agreements
Consult an Experienced Contract Law Attorney to Review Term Sheet Negotiations
Whether you’re a majority or minority owner, it’s possible to structure term sheet negotiations so both parties benefit and the terms blend seamlessly with a company’s goals and objectives.
At Kinetic Law, we have years of experience counseling entrepreneurs in business formation and structure, debt and equity financing, drafting, reviewing, and negotiating essential documents and contracts, including term sheet negotiations. We also offer general counsel services. Contact us today for more information, or move forward and schedule a consultation.