The Term Sheet (Offer)

TreIt’s a good idea to check:

• • are your company records up to date;
  • do you have contracts in place with key customers, suppliers, employees;
  • do you own all the intellectual property rights you think you do?

These are just some of the things investors will look at.  It’s common to identify issues at the due diligence stage and often these are not critical, but better you know about them first than a potential investor pointing them out to you.

If investors are interested in your business plan, they are likely to want to meet with you to discuss things in more detail.

Although it takes different forms, the due diligence or checks and verifying process is really about asking questions and trying to verify the key assumptions and spot the easily avoidable mistakes. As it progresses, diligence may involve some modelling and scenario building. It will usually involve a couple of more meetings with the team and a bit of research and reference checking. For some angel groups it might be a more formal team effort focused on digging into a longer checklist of issues and preparing a formal due diligence report which can be used by peers and syndication partners.

If the diligence is going well, the angel group manager leading the deal will begin to talk to the entrepreneurs about prospective deal terms. (There also might be a sanity check before diligence even starts to make sure people are in the same ballpark.) It is at this point issues like deal structure, valuation and deal terms are discussed, with the goal being to negotiate a mutually acceptable set of terms and document them in a Term Sheet.

Valuation

Valuations vary hugely, and so does the basis of valuation. Sector, stage, region country and economic climate all make huge differences. There are financial forecasting methods such as net present value of forecast revenue and other rule of thumb methods. However at the early stage pre seed it is often broken down into simple blocks valuing the team, the idea / IP, customer traction and revenue forecast.

While you are waiting for a term sheet you may be presenting to other angel groups

So while you are undergoing the courting process and due diligence and talking about term sheet issues, you are also trying to get a sense of how much investor interest is currently engaged, and how much additional money needs to be found. This is the beginning of the process typically referred to as deal syndication.

The goal of the entrepreneur and the lead investor is to bring like minded investors in as quickly as possible. Naturally there is some tension between fast and desirable, because you cannot hold up your closing forever waiting for preferred investors when there is money being offered by acceptable investors as long as they are aligned in the vision and goals for the company.

By preferred and acceptable, we mean more than just reputation and whether they are nice people. The key issues are alignment amongst investors and alignment between investors and the management team, and value-add in terms of expertise and connections.

It is obviously also necessary to find investors who will accept the terms as negotiated; if every investor wanted to renegotiate the terms of the deal, chaos would ensue and the deal would never get done.

If you don’t already have legal advisers then you should appoint them at this stage.  They will help to guide you through the term sheet and explain what it all means.

S/EIS Tax Assurance

You should also consider appointing tax advisers and think about S/EIS tax reliefs if you haven’t done so already.  These are reliefs commonly sought by investors in early-stage businesses and can be very valuable so it is worth checking whether your company will qualify.

Investors will also want to know whether their proposed investment will qualify for S/EIS relief and will probably ask you to obtain an “advance assurance” from HMRC.  Response times from HMRC can vary so you need to factor this into your timeline.  That said, you shouldn’t apply too early i.e. without there being a real prospect of an investment being made so it is a fine balance.  A tax adviser will be able to help you with the submission and advise you when’s the right time to apply (often around about the time the term sheet is signed).

You’ve Signed the Term Sheet, what happens next?

Now the work begins!

The investors may want to carry out more detailed due diligence now, including financial and technical due diligence as well as legal. Visit the page on Due Diligence Details for more information. Their lawyers may send you a due diligence questionnaire (a “DDQ”) with a list of questions for you to answer and documents you need to provide. Having your company records up to date and your contracts stored in digital format will help to streamline this process.

You will also agree the Investment Documentation with the Investors. It is sensible to clarify who will do what, (see below). Normally the lawyers for the Investors will prepare the Investment Agreement and Articles, whereas the lawyers for the company (your lawyers) will prepare the Disclosure Letter and ancillary documentation (disclosure bundle).

Legal Templates

We have developed standardised legal templates that we use for Mint Ventures deals written from a founder’s perspective to help with understanding and to enable legal costs to be kept to a minimum.
Complete the form to access the templates

Once investment documents are agreed between the company and the investors, they should then be circulated for signing. Very often this is done using an electronic signing platform such as DocuSign. It is important to clarify who needs to sign what and make sure all signatories are available to sign quickly when asked.

Once all the conditions precedent have been completed (or waived by the investors) and the investment documents have been signed, the deal will be complete and the investment funds can be transferred to the company’s bank account.