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As a startup founder that is seeking to raise capital, you may have a number of potential investors. Some of these investors may have stronger bargaining power than others, while 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 explore whether you can do so by using multiple term sheets with different investors.

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 valuation of your startup;
  • the amount of the investment and the total round;
  • the type of shares your investors will receive (and the rights that those shares will carry) and;
  • any other key terms that your investors wish to include. For example, key provisions of your shareholders agreement.

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. The term sheet allows your startup and potential investors to more efficiently negotiate and agree on the key terms of the investment.

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 on the same terms or not. The lead investor will then be responsible for negotiating the transaction documents on behalf of all investors. The lead investor is usually a sophisticated and experienced investor, for example, a venture capital company. This provides the other investors with the comfort of knowing that someone with experience is looking after their interests.

Can You Negotiate Multiple Term Sheets?

Your startup should only use one term sheet for each round of capital raising. Your investors should agree on the same terms, with a few exceptions.

For example, your term sheet may provide that only one specific investor (usually the lead investor) has the right to appoint a director. However, the other terms of the investment, such as your company’s valuation and share price, should be the same across all investors.

If your startup attempts to negotiate multiple term sheets on different terms with different investors, there could be a number of issues that may arise. Firstly, you could have different investors acquiring shares at different values simultaneously. Doing this could have adverse tax implications. Importantly, the value of the shares that you are issuing to your investors should reflect the market value of the shares. This also ensures that there are no tax consequences. If you issue shares at different values at the same point in time, some of the share issues could be deemed to have been sold for below market value.

Your startup could also face the difficulty of certain investors demanding certain rights that may conflict with the terms of the other term sheets. For example, a term sheet sets out the key terms of your company’s shareholders agreement, including:

  • who has the right to appoint a director;
  • drag-along and tag-along thresholds; and
  • other decision-making mechanisms.

If different investors are negotiating these rights simultaneously but separately, they could conflict with one another. This would make finalising the shareholders agreement very difficult.

Key Takeaways

Although your startup may wish to negotiate different terms with different investors by preparing different term sheets, you should not do this. Your startup should negotiate one term sheet that is acceptable to all investors in the round. Each investor should agree to the same key terms. You can seek to differentiate between investors by giving some investors greater rights in your startup’s shareholders agreement. However, the overall terms of the investment itself (e.g. your company’s valuation and share price) should be the same. A term sheet is an important 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. If you need any assistance with your startup’s term sheets, get in touch with LegalVision’s capital raising lawyers on 1300 544 755 or fill out the form on this page.


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