SG Company Funding: Most companies looking for funding are not familiar with the different types of funding available. This article will help you find out how to negotiate effectively with an investor when the investor offers you a term sheet. Our article assumes that you are raising funding from a growth investor (growth private equity investor) rather than a buyout fund that wants to buy out the controlling interest from you.
A growth private equity firm will typically look for companies that are profitable and growing. If your company falls within the investment mandate of such growth private equity firm and the firm is interested in investing in your company, the firm will issue you a term sheet which is usually non-binding.
What is a term sheet?
A term sheet (unless otherwise stated in the term sheet) is a non-binding offer by the investor to invest in your company.
Why should you appoint a corporate lawyer with you at the negotiation stage of a term sheet?
To an institutional investor, they will honour and place great importance on the key terms of a term sheet. This means that when the term sheet is signed, the key terms of the term sheet will be translated into the transactional legal documentation. So while you may not understand the intricate details of the term sheet, not appointing a corporate lawyer early in the transaction may result in you giving up key commercial points in the negotiation for a deal.
3 Key Points that you should note when negotiating a term sheet
Key Point #1: Exclusivity Period under the term sheet for SG Company Funding
Firstly, always spend some time to think through how long the exclusivity period will be under the term sheet. There are some investors who love to explore a lot of deals but do not have any real intention to invest in your company. Thus you should have an exclusivity period whereby if the investor does not invest, you can bring your deal to another investor to raise funding (i.e. so that you are not stuck with any one investor that does not want to invest but still cannot fund raise from other investors).
Key Point #2: Structure of the Investment Instrument under the term sheet for SG Company Funding
Secondly, the structure of a SG Company Funding deal needs a lot of thought and analysis. From an investor’s point of view, he will look at your deal from a risk to investment perspective.
This means that if he deems that your company/stage of growth of your company is higher risk or if your company and the investor cannot agree on the valuation of your company, the investor may invest into your company using a convertible bond.
If you can agree with your investor on the valuation of your company or the investor thinks its lower risk, he may propose to invest in your company the issue of preference shares. Preference shares have may rights and terms and an explanation of what they are would require another article in itself. But for your commercial negotiation purposes, you need to know if you intend for the preference shares to be equity in nature (i.e. non-redeemable preference shares) or debt in nature (redeemable preference shares) and whether the preference shares have a preferred dividend (this means that whether your company does well or not, it has to pay out this preferred dividend to the holder of the preference shares).
Key Point #3: Key Commercial Points of a SG Company Funding deal
The key commercial points to negotiate for SG Company Funding deal are, how much money the investor is investing and what proportion of the shareholding of the Company the investor will hold on a post-diluted basis. If the investor uses a convertible bond or convertible instrument like a warrant, it is always good to do a simulation with the investor to see the potential dilution arising from such a convertible instrument (in all three scenarios, base case, downside and upside scenarios).
Term sheets for funding transactions are key parts of the transactions so appointing a good corporate lawyer early in the negotiation stage is important when trying to close a funding deal with an investor.
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