TERM SHEET PART1: WHAT FOUNDERS NEED TO KNOW ABOUT TERM SHEET?

Term Sheet seems to be the word to sweep any Startup Founders off their feet and make their knees weak. Most will start seeing the phantom $$ sign floating right before their eyes and the sound *cha ching* ringing in their ears playing in a loop (okay I’m exaggerating, it is actually because their business idea gets validated… Yeay! 🎊🎊🎉🎉🎁).

This article will be the Part 1 of 2 and at the end of Part 2 I shall include a sample Term Sheet, for easy reference but please read the series of articles first]

  1. TERM SHEET PART 1: WHAT FOUNDERS NEED TO KNOW ABOUT TERM SHEET?
  2. TERM SHEET PART 2: KEY CLAUSES TO NEGOTIATE IN TERM SHEET

I discovered that some Founders seem to either (1) misunderstand the function of Term Sheet or (2) does not take full advantage of it. I don’t blame Founders on this because Accelerator and Incubator is meant to get you market ready, instead of teaching boring legal stuff. So on my part I shall do my best to depart what I know.

TERM SHEET AS A GENERAL RULE IS NOT LEGALLY BINDING

Unless specified otherwise in the Term Sheet – clauses/paragraph/section in a Term Sheet is not legally binding. It is used for negotiation purposes only.

(I’ll explain further about the clauses that you may want to be legally  in part 2, so chill first alright)

WHAT IS THE POINT OF HAVING TERM SHEET THEN?

At this juncture you would probably be wondering… if it is not legally binding – might as well just draft the final agreement and negotiate based on that. Here is why NOT:-

  1. Drafting Final Agreement cost more (~~ RM5-RM25k or more) depending on Law Firm and complexity.
  2. In view that parties are still at negotiation stage there’s no need to spend so much for an Investment which may or may not take place.

WHY IS TERM SHEET RELEVANT?

  1. It outlines the important/key terms which will be incorporated in the final agreement.
  2. Parties will then negotiate on the important/key terms.
  3. At this stage, parties will also negotiate and conclude on the commercial terms i.e. Investment Amount, Valuation, Remuneration, Vesting Schedule and Etc.
  4. MOST IMPORTANTLY, PEOPLE FORGET!!! – it can be quite frustrating to be in an investment negotiation where one party says RM100k for RM1million valuation this week and change it to RM50k for RM1million valuation next week!!!
  5. Cost – because parties have already agreed on the fundamental terms, the conclusion of the final agreement should not take too long as any further negotiation will be kept at a minimum.

IMPORTANT NOTE:- Set out important terms that needs to be negotiated in the Term Sheet – negotiate, amend and sign to ensure that parties are on the same wavelength.

(I had one deal that came to me where Founders thought they were giving away 10% but the Investor was in fact expecting 25% – In this case all negotiation was done verbally!)

WARNING:- Please get independent legal advise before negotiating and signing a term sheet – although it’s not legally binding but its just bad for your reputation to agree on the Term Sheet and  go 360 degrees on the Final Agreement.

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