4.4 Term Sheet Conditions NACO Academy Module 105: Structuring Deals and Term Sheets is one of the most highly attended workshops. The module covers 25 different deal terms and provides examples and lessons learned from a panel of Angels. (See NACO Online Sample Documents: Sample Term Sheets .) In this module, each deal term, what it means, and when and how it is used is explained. (There are various other online resources available, such as Founders Fund Term Sheets Explained in Plain English .) Term sheets are short, non-binding expressions of interest between the Angels and entrepreneurs. These terms form the basis for creating the legally binding, and expensive, subscription and shareholder agreements. Legal fees for the final closing documentation usually run from $10,000–30,000 but can range as high as $50,000. If all of the Angels in a deal use a single lawyer, costs can be minimized. There are many reasons why each term sheet would be unique. Numerous factors drive the term sheet conditions, including management experience, board members, previous funding, need for follow-on funding, anticipated exit, and quality of the due diligence materials. There are several ways you can break down the terms in a term sheet: binding (e.g., no shop agreement, governing law) vs non-binding terms (e.g., representations, warranties and covenants); terms that deal with governance vs terms that deal with financial issues; or terms that relate to common, preference and convertible deal structures. For negotiation purposes, each of the 24 deal terms can also be classified into one of three categories: integrative, distributive, and mutual agreement. Integrative terms – More important to one party than the other and central to the idea of trading off terms to create win-win agreements. For example, founders may strongly dislike the vesting of founder shares or liquidation preference, but be very willing to consent to other terms, such as tax credit application and an investor’s right of first refusal to invest in future rounds of financing. Distributive terms – Equally important to both parties and a loss to one party is a gain by the other. Mutual agreement terms – Both parties may mutually agree on certain terms, but if they fail to recognize this during the negotiations, they lose the opportunity for win-win agreement. Bryan Watson adds a 25th deal term to this list: “For most entrepreneurs, their first Angel investment coincides with the first external board member joining the company. As such, there is often a requirement for the company to secure appropriate Director and Officers Insurance (D&O). As an Angel, I believe this is a necessary requirement in a term sheet, if you are taking on a board seat. It is usually low-cost to the entrepreneurs and protects investor-directors from liability that pierces the corporate veil. Most independent board members worth their salt will also look for this to be in place.”
76 A Practical Guide to Angel Investing
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