A potential investor may contact you with a term sheet after conducting an evaluation of his company, if he feels that his company is worth investing in after he has completed the evaluation process.
Negotiation of term sheets
This post won’t discuss reading or negotiating a term sheet template in India as it is a very technical topic. I would recommend you to work with an experienced and trusted lawyer to avoid making any mistakes that would be costly. Other founders who have been through this process might also be able to offer you further insight.
It is important to understand that term sheets are non-binding documents that record the intent of two or more parties to enter into a future contract based on certain terms (which are incomplete or preliminary) that have been specified. It is the contract that lays the foundation for the future terms and conditions. Typically, a VC’s investment proposal contains information about the amount the venture capital fund is willing to invest, the value of your company for this round, as well as the shares they will receive in return.
In terms of term sheets, one thing you must remember is that they are non-binding agreements. If you or the VC decide not to invest for any reason, then the deal will not be finalized. Sometimes, even after issuing a term sheet, venture capitalists cancel their investments for no apparent reason. This is clearly bad behavior, and you should stay away from them as much as possible.
However, there are also some good reasons why investors might decide to walk away after receiving a term sheet from a deal. During due diligence, the investor might discover some issues that weren’t initially mentioned by the founders that were unexpected.
Here are some resources you may find useful:
- The Term Sheet Series: Brad Feld’s Wrap-Up
- Pawel Chudzinski discusses how startup liquidation preferences can hurt them
- Get a great deal on term sheets with Venture Hacks
Startup due diligence
The due diligence process is simply a way to check specific aspects of a deal. For example, your company’s success depends heavily on a patented technology. Before investing in you, the investor needs to make sure you are the right owner of that patent. In order to ensure that everything is done correctly, the investor needs to be sure that you are the real owner of that patent.
Normally, a light due diligence process is conducted at this stage. It includes legal, technological, and human resources considerations that can be assessed by external agencies or within a company. At the early stages, due diligence is typically performed simply.
Agreement on a contract
You don’t have to worry about it, but it’s worth mentioning. Before signing any contract, you need to make sure you understand it well and make sure that any terms you are uncomfortable with have been negotiated. You should consult a lawyer familiar with this type of contractual arrangement.
When does a term sheet become a contract?
The process can be short and simple if all parties align right away. However, if it is a complex deal which requires heavy due diligence, legal restructuring or aligning with many investors, it can take a few months to complete the deal.