US Corporate Law 20 Episodes (10)

What is the Term Sheet for Venture Capital? It turns out that most of the terms have no legal effect? !

In the last issue we talked about a mysterious call from an investor. After this call, you will soon receive an email, which is the Term Sheet (term sheet). Because there are too many technical terms in the term sheet, we will explain it in several installments.

The Term Sheet "Term Sheet", or "Letter of Intent", is a summary of the main terms of the venture capital that startups and investors expect to achieve. Why have an investment letter of intent? Many entrepreneurs who are new to the industry may think that taking investment means that venture capitalists put money into your startup company's account. But the process is actually far more complicated than you might think. For a formal round of venture capital, even if it is a seed round, there are 20 documents for the entire transaction, and the time for the lawyers of both parties to draft and revise the documents often takes 1-2 months. If it is A round, it may take 2-4 months. For transactions above the B round, the transaction time may even reach 3-6 months. So it is obviously necessary to set the big framework through the investment letter of intent at the beginning.

If you see a venture capital investment with a very short period of time, completed within a month or even a week, it is often because the bargaining power of the two parties is very large, or the startup company is a special shooter, and each investor is very difficult to get. There is another kind of money stuffed inside. Start-up companies are particularly weak. It is enough to get a little money, no matter what the conditions are. The reason why this kind of investment saves time is that after one party's lawyer drafted it, the other party signed it directly because it was very weak, without any review by the lawyer. Of course the risks will be huge.

Of course, I am talking about the negotiation time between the startup company and the leading investor among the investors. If you are a co-investor, the agreement you usually get is already finalized, and you can only choose to follow or not, sign or not sign power up.

The term sheet is 5 pages, the short ones are even 2 pages. However, the information density is extremely high, and the technical terms are one after the other. Let me tell you about the common technical terms in the term list first.

Let’s listen to the first set of concepts first.

Closing Date

Investor

Investment Amount

Price Per Share

Use of Proceeds

Stock Option Pool

It seems okay to hear this, then go down and listen to the second set of concepts:

Dividends

Liquidation Preference

Protective Provisions

Anti-Dilution Provisions

Conversion

Information Rights

Registration Right

Lock-up

Participation Right

Right of First Refusal

Right of Co-Sale

Drag-Along Right

Board of Director

Voting Rights

After hearing so much, you may have begun to doubt life. Barely listen to the last set.

Exclusivity

Expense

Confidentiality

Expiration Date

In fact, among so many concepts in the term list, the only ones that are truly legally binding are the last set of these, exclusivity clauses, fees, confidentiality obligations and expiration dates. The term sheet is often written at the beginning, except for these few items, the others are non-binding non-binding terms. But that doesn't mean that signing is the same as not signing. After the content of the term sheet is determined, the lawyers of both parties will begin to refine and produce a formal investment document according to the framework set out in the term sheet. If the startups and investors renegotiate and overturn the framework set in the initial term sheet at this time, on the one hand, it will greatly destroy the trust between the two parties, and on the other hand, it will greatly increase the cost of legal fees. Judging from the cases we have done, often 20%-30% of the two parties who have signed the term sheet, after several months of lawyers drafting and revising documents, finally give up halfway, and there are still no actual transactions.

This issue provides an overview of the term sheet, and I'll go into some of the details in the next issue. If today's show is helpful to you, please give me a like, and if you have any related questions, please leave me a message in the comment area.