As a company entering into a possible investment, when accepting an investor term sheet, consider the provisions relating to termination of that term sheet.  There’s nothing worse than being stuck in an unlimited holding pattern while trying to raise funds.

Here are some tips to make sure that your interests are protected.

  1. Set an automatic termination date (30 days, 60 days) that will provide sufficient time for due diligence and receiving and reviewing legal documentation.
    (The termination date can be extended after that day by written approval).
  2. Make sure that the termination provision is in writing (can be in a non-binding term sheet with certain binding provisions, including the termination mechanism).
  3. Avoid a term that requires the company to pay legal fees, unless the deal successfully closes.
  4. Honour the “no-shop/break fees” clause (if any) i.e. do not start shopping the deal around, or you may be on the hook for paying the agreed-upon break fees.
  5. Don’t start performing as if the deal has closed until it actually closes i.e. until funds are transferred, documents are signed, and so on.  The court has looked at “non-binding” deals in which the parties starting to work together, co-market and so on, and in some cases has considered that the deal had actually closed based on such (and other) performance by both parties.
    In doing so, the court has found that a “non-binding” term sheet is therefore binding.

Reviewing multiple term sheets can be tricky.  In some cases the investors will welcome co-investors, and will agree that a lead investor can protect their interest, can be responsible for management decisions, and so on.  In other cases, the investors will consider themselves competing.  When faced with multiple term sheets you as a company should consider the long term strategic relationship that you are looking to develop, trust your instincts, and make sure that you consult with your trusted advisors and legal counsel before selecting your investor.


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