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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.

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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.


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