How do a write a simple term sheet for a small company investment?
May 29, 2015 7:11 PM   Subscribe

Can anyone point me to any information (template, etc) on a term sheet for a single round of investment in a company that has no plans to go public?

All the term sheets I have found are for seed rounds, a rounds, etc. I am looking for a simple term sheet for a company that is just looking for one round of investment, has an amount of money they plan to return to investors. In many ways perhaps it is actually a loan agreement? Based on the the below do we need a term sheet or a loan agreement? (note this is not for me helping a friend)

For example the general plan is:

We would like to start with a 40% for investment of $x....would return $x+$y mill after three (3) years of sales and keep investor on the board with 25% after payoff.....with no penalties for early payoff. Would be willing to accept up to 49% to investor if we have to, but would drop long term control to 20%
posted by UMDirector to Work & Money (5 answers total)
If there's more than a couple of hundred thousand dollars at stake here, it's worth getting a lawyer to draft this for you. Nothing you find on the internet is going to meet your specific circumstances - and it really makes a lot of difference whether this is a loan or an equity investment. To both the company and the investor. From the point of view of liability and tax and exit rights, and for a whole lot of other reasons. At the very least you need an experienced corporate finance CPA.
posted by yogalemon at 8:38 PM on May 29, 2015

This is not something you can do by filling in the blanks on a sample term sheet. You need actual legal advice when it comes to figuring out how to invest millions of dollars in exchange for a substantial percentage of a business.

There are various options for both loans and investments, along with hybrids that combine the two, which have a lot of different implications for both sides in terms of control, liability, taxes, implications for future rounds of investment (I know the company isn't looking for it, but it may still happen as circumstances change), how it impacts existing owners/investors/creditors, etc... A lawyer is the person who can advise your friend on the impacts of different funding models. A term sheet you print off the internet can't do that.
posted by zachlipton at 8:41 PM on May 29, 2015

Get a lawyer. Look at the But get a lawyer.
posted by slateyness at 6:46 AM on May 30, 2015

Yes, get a lawyer, there is no simple way to do any investment. There are many ways to structure what you want to do either as debt, or equity, or some hybrid. A lawyer can advise you.
posted by Nelson at 7:33 AM on May 30, 2015

Yes, get a lawyer – securities law can be tricky. But before you do, at least think about the major issues and what you and the investor would like. The lawyer can figure out how to write up an investment agreement that achieves that. There are standard Terms & Conditions to implement almost any arrangement you want. The important thing is to consider all the possibilities and decide what you need to offer, in order to get the investor to give you the money. Most of the tricky T&Cs are things demanded by investors who have been burned in the past by some unexpected turn of events.

How will the investor get their reward – a regular and fixed payment (interest on a loan) or an irregular payment that may go up and down with the fortunes of the company (dividends on shares)? Can this form be changed later? Does the investor get any additional reward if the company is very successful in using their money (“kickers”)?

How will the investor get their original money back? Will loan payments include principal repayment, or will principal be repaid in lump sum on a fixed future date? Can the shareholder sell their shares to someone else, or just back to the company? When and under which conditions could this happen? What happens if the company doesn’t have the money at that time? If push comes to shove, can the investor force the company to let them sell to someone else? (investors often care a lot about ensuring their eventual “exit” from the deal)? Can the company force the investor to take back their principal early (denying them future interest payments for a loan, or forcing them to give back shares that they wanted to keep)?

Does the investor get anything else besides rights to a reward and the repayment of their principal? Do they get information about what the company is doing with their money? Do they get to have a seat on the Board of Directors? Do they get to vote like shareholders? Do they get veto power over certain decisions that might threaten the ability of the company to pay them back? What happens if the company gets into temporary trouble and cannot give its reward payments for a while? What happens if the company dies and there isn’t enough value in the scraps to pay back the principal?
posted by NotAlwaysSo at 1:28 PM on May 30, 2015

« Older Looking for the biggest and best battle stalemates...   |   rough / abraded upholstery after professional... Newer »
This thread is closed to new comments.