Frequently asked questions
What happens if the term sheet is breached?
The term sheet is non-binding, meaning that no consequences arise from the breach of the agreement. There are only couple of provisions which are binding to the parties - no-shop, confidentiality, governing law and jurisdiction. If the party breaches one of those agreements, he has to compensate the possible damages caused by the breach.
It should be taken into account that negotiating in bad faith (e.g. with no intent to enter into a binding contract) may result in a situation where the breaching party is required to pay the non-breaching party an amount equal to the value the non-breaching party would have received under a definitive agreement in the same terms as the term sheet (see the judgment of Delaware Supreme Court in SIGA Technologies v PharmAthene Inc.).
How is the equity amount the investors acquire determined?
The amount of equity is usually determined by the amount of the investment and the company’s pre-money or post-money valuation. The parties can choose whether it will be based on the pre-money (i.e. before the investment) or post-money valuation (after the investment), but attention should be paid to the fact that if the parties agree on the pre-money valuation, the amount of equity for the investor is bigger. In addition to that, if agreeing on the post-money valuation, the parties cannot be sure about the amount of equity received by the investor, due to the fact that the final amount of investment might change.
What kind of preferential rights do the investors receive?
The investors are entitled to receive in preference to the other shareholders the liquidation preference and, if agreed so, the amount might be multiple times the amount invested. Also some important decisions (named in the term sheet) may require prior written agreement of the holders of majority of the new shares (shares issued to the investors). Investors have the right to receive reporting and financial information as stated in the term sheet. Moreover, the parties can agree in the term sheet on some provisions which give the investors additional rights (e.g. drag along, pre-emption etc).