Reading time: 5 minutes

As a startup founder seeking to raise capital, you may have several potential investors. Some of these investors may have more substantial bargaining power than others. Alternatively, some may be of greater value to your startup. As a result, there may be times when your startup wants to close some of the investments on different terms. One of the first steps in the capital raising process is usually to sign a term sheet with your investors. Sometimes, you may want to agree on different terms with different investors. This article will discuss whether you can do so by using multiple term sheets with different investors.

The Ultimate Guide to Starting an Online Business

It’s now easier than ever to start a business online. But growing and sustaining an online business requires a great deal of attention and planning.

This How to Start an Online Business Manual covers all the essential topics you need to know about starting your online business.

The publication also includes eight case studies featuring leading Australian businesses and online influencers.

Download Now

Capital Raising Process 

The capital raising process typically follows the following steps:

  1. First, the company pitches to the investors and enters into discussions, usually with one key investor who chooses to lead the investment round.
  2. The company and the lead investor (or multiple investors) negotiate and agree on a term sheet.
  3. Parties prepare the transaction documents. These are typically the shareholders agreement, subscription agreement and company constitution.
  4. Parties prepare a cap table.
  5. An investor (or investors) conducts due diligence on the company.
  6. Company lawyers prepare ancillary documents, including resolutions and share certificates.
  7. Transaction documents are circulated and executed by all parties.
  8. Completion of the funding round occurs on an agreed date, with investors transferring funds on that date.
  9. Finally, the company will update its members register, issue share certificates and update ASIC with its changes. 

It is worth familiarising yourself with the above process as the capital raising process is quite extensive and contains many steps. Being familiar with the terms and processes will help ensure your understanding and minimise any difficulty or confusion when carrying out the process.

What Is a Term Sheet?

The first step in most capital raises is for your startup to agree on a term sheet with the investors. A term sheet is a summary of the key terms of the proposed investment. It includes terms such as the:

  • agreed pre-money valuation of your startup;
  • total investment amount; and
  • type of shares your investors will receive (and the rights that those shares will carry).

Additionally, it may detail any other key terms that your investors may wish to include, such as certain company decisions that may need investors’ approval.

Your term sheet will typically be finalised and signed before the longer-form documents (such as a subscription agreement and shareholders agreement) are prepared and signed. Thus, the term sheet allows your startup and potential investors to negotiate and agree on the key terms of the investment more efficiently.

If an investment round contains multiple investors, you will usually have one investor who is the ‘lead investor’. The lead investor is the investor who initially agrees on the key terms of the round with your company. Other investors will then decide whether to participate in the round (up to the agreed maximum raise amount). Finally, the lead investor will negotiate the transaction documents, with other investors required to come in on the same (or similar) terms. 

The lead investor is usually a sophisticated and experienced investor, for example, a venture capital company. 

Can You Negotiate Multiple Term Sheets?

While theoretically possible to do, your company should steer clear of negotiating different term sheet with each investor in your capital raising round. While some investors may have greater rights than other investors under the same round (e.g. board appointment rights), the overall terms of the investment (e.g. your company’s agreed pre-money valuation and share price) need to be the same. 

Consequences of Negotiating Multiple Term Sheets

If your startup attempts to negotiate multiple term sheets on different terms with different investors, several issues may arise, including: 

  1. investors trying to agree to a different pre-money valuation, impacting the share price; and
  2. investors demanding rights that conflict with demands of other investors under other term sheets, meaning negotiating a shareholders agreement (to be entered into by all investors) becomes unnecessarily complicated and protracted. 

In practice, one lead investor typically negotiates the terms of the capital raising round with the company. Consequently, that investor enters into a term sheet with the company. That term sheet then dictates the terms of the transaction documents that all investors will enter. 

Given that the lead investor is prepared to take the lead on negotiations, they typically benefit by driving the term of the capital raise and getting certain rights that other investors may receive. For example, the lead investor may have veto rights on key company decisions. The other investors are usually investing less money. Thus, they will have limited opportunity and ability to negotiate any changes to the key terms agreed between the lead investor and the company. 

Key Takeaways

A term sheet is an essential step in the capital raising process. It is equally important for your startup and potential investors to ensure that the term sheet is negotiated and agreed on properly. Importantly, your startup should negotiate one term sheet that is acceptable to all investors in the round. You can then seek to differentiate between investors by giving some investors greater rights in your startup’s shareholders agreement. 

If you need any assistance with your startup’s term sheets or the capital raising process, contact LegalVision’s capital raising lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

How should I raise capital?

There are three standard options for a capital raise. These options are an equity round (either ordinary or preference shares), convertible loan or notes or a simple agreement for future equity (SAFE). Each structure has benefits and drawbacks, so it is best to research which is best for your startup’s growth plan.

What is an Employee Stock Ownership Plan?

An Employee Stock Ownership Plan (ESOP) or Employee Share Scheme (ESS) is an employee-owner scheme that provides a company’s employees with an ownership interest in the company through stock ownership.

Webinars

Redundancies and Restructuring: Understanding Your Employer Obligations

Thursday 7 July | 11:00 - 11:45am

Online
If you plan on making a role redundant, it is crucial that you understand your employer obligations. Our free webinar will explain.
Register Now

How to Sponsor Foreign Workers For Your Tech Business

Wednesday 13 July | 11:00 - 11:45am

Online
Need web3 talent for your tech business? Consider sponsoring workers from overseas. Join our free webinar to learn more.
Register Now

Advertising 101: Social Media, Influencers and the Law

Thursday 21 July | 11:00 - 11:45am

Online
Learn how to promote your business on social media without breaking the law. Register for our free webinar today.
Register Now

Structuring for Certainty in Uncertain Times

Tuesday 26 July | 12:00 - 12:45pm

Online
Learn how to structure to weather storm and ensure you can take advantage of the “green shoots” opportunities arising on the other side of a recession.
Register Now

Playing for the Prize: How to Run Trade Promotions

Thursday 28 July | 11:00 - 11:45am

Online
Running a promotion with a prize? Your business has specific trade promotion obligations. Join our free webinar to learn more.
Register Now

Web3 Essentials: Understanding SAFT Agreements

Tuesday 2 August | 11:00 - 11:45am

Online
Learn how SAFT Agreements can help your Web3 business when raising capital. Register today for our free webinar.
Register Now

Understanding Your Annual Franchise Update Obligations

Wednesday 3 August | 11:00 - 11:45am

Online
Franchisors must meet annual reporting obligations each October. Understand your legal requirements by registering for our free webinar today.
Register Now

Legal Essentials for Product Manufacturers

Thursday 11 August | 11:00 - 11:45am

Online
As a product manufacturer, do you know your legal obligations if there is a product recall? Join our free webinar to learn more.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards