After an initial period of diligence on your business, hopefully, your investors will be even more interested in joining you on your journey! If so, you can expect to receive term sheets.
Timing is a key step to obtaining some attractive offers! If you have hired an Ithaca specialist to help you coordinate the process, you will be in control of the timeline and, in all likelihood, you will be receiving the offers simultaneously. This will allow you to compare the offers side-by-side and select the ones which you think are most attractive.
If you are not in control of the timeline and you are receiving offers at different times, you will not be able to perform a side-by-side comparison. This means that you will not always be able to select the most attractive offer, or that you might have to delay the process, at the risk of investors losing interest. Therefore, it is crucial to structure the process and ensure that all parties are following key deadlines.
Comparing term sheets
When comparing offers the headline items of interest tend to be money raised and pre-money valuation. However, here are some other considerations to pay attention to and that you should factor into your decision:
- Liquidation preferences - specifying that investors will take priority over other shareholders in the distribution of returns
- Conversion to common shares - allowing investors to convert their preferred shares to common shares if, by doing so, the returns would be higher than with the liquidation preference
- Pay-to-play - requiring investors to take place in future financing rounds if they want to avoid their preferred shares being converted to common equity
- Anti-dilution - determining that, in case of a future round of financing should take place at a lower valuation, the investor will automatically receive shares to maintain their existing shareholding
- Board seats - will specify how many board seats will be required from a new investor as part of the transaction. Given the board controls the company, this could entail the founders becoming a minority and losing control
- Voting rights - allowing them to cast votes as common equity shareholders, even if they hold preferred shares
- Drag along - preventing a majority of common shareholders (such as founders) to block the sale of the company
- Dividends - dividend payments that might be cumulative or non-cumulative
Remember that term sheets are not definitive and do not offer any guarantee of investment. However, you should still negotiate the most favourable terms possible as these will then provide the basis for the legal documents underpinning the deal, the Stock Purchase Agreement and the Investor Agreement.
Our finance specialists can help you navigate the commercial terms and help you understand how to best negotiate on those key points.