A term sheet is the document that structures the negotiation of an investment before entering into full legal drafting. It is not usually the final contract, but it sets the ground: price, percentages, rights, and conditions. In the seed phase, its value lies in avoiding misunderstandings and saving time. Its danger also lies there: if you sign something without understanding what is binding and what is not, you can become tied to conditions that limit you.
The first practical step is to separate three blocks:
- Economic conditions
- Execution conditions
- Governance.
In the economic part, the essential elements are the pre-money valuation, the amount to be invested, the resulting percentage, and whether the capital increase includes premium. Here it is advisable to require that everything be expressed in consistent numbers, avoiding ambiguous phrases. If the document mentions “post-money valuation,” it must be clear that it is the sum of the pre-money valuation plus the new money. This part is “core,” not noise.
In execution conditions, what matters is what must happen for the operation to close: timeline, exclusivity, due diligence, internal approvals, and suspensive conditions. Exclusivity is a critical clause. If granted, it should be short, with a deadline, and linked to milestones on the investor’s part, for example, delivery of information list and closing of review within a specific timeframe. It is also key to establish who pays what, especially legal costs. In seed stage, accepting disproportionate or undefined costs is often a mistake.
The third block, governance, is where the rights that can condition your day-to-day appear. Here three families matter: information rights, control rights, and investor protection. Reasonable information rights are periodic reports, for example monthly or quarterly, and access to annual accounts.
In control rights, attention is placed on vetoes. A veto is not “advice,” it is the power to block decisions. It is not unusual for the investor to request vetoes over raising capital, taking on debt above a certain threshold, selling relevant assets, or changing the business activity.
Finally, before signing, verify two things:
- Which sections are binding (normally confidentiality, exclusivity, and costs)
- Which sections are only intention.
And add a final list of “pending definition” so that important matters don’t remain up in the air. A good term sheet does not impress by its length, but because it closes the points that truly affect risk, control, and price, and prevents noise from distracting you from what is essential.
It is advisable to approach rebranding professionally, seeking specialized advice to guide the process. Request free advice from the Economic Office of Galicia and use the available resources to boost your company.
