Term Sheet Basics
- Startups

Term Sheet Basics

Recently, we had the chance to talk about term sheets and early-stage investing with Dr. Schneider.

Term Sheet Basics

What do Founders care about when it comes to term sheets?

Sometimes it is only the valuation – that is sad as all the other clauses are important. But this gives an angel a good opportunity to secure some additional rights.

These may include:

  • preemptive rights – the ability to invest in future rounds to avoid dilution,
  • liquidation preferences – who gets paid what, when.
  • drag along with rights – where a simple majority of shareholders can decide to sell the company – This protects all shareholders from, say, one small, stubborn shareholder refusing to sell their shares in an acquisition offer and blocking a deal everyone else wants to see happen.

What do investors want that Founders look to push back on?

Typically, the key point of contention is valuation. Many angel investors have limited flexibility in valuations (as they sometimes come from the industry and know that without customers, revenues, etc., you don´t have any value at all). These investors don’t see start-up valuations over 500k as reasonable. But still, it is not industry standard here, and seed valuations of over 3M are possible. In the US, it´s a lot higher.

Does a seed-stage company really need a term sheet, isn’t it going to be renegotiated in the Series A round f financing?

A term sheet helps both Founders and investors to see what deal they are going to close. Of course, the deal done in a seed financing is renegotiated later, but some elements will survive.

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What are your thoughts on Convertible Notes?

Convertibles are a perfect instrument for start-ups and also angel investors. In my practice, convertibles are often used; however, in my opinion, in the German market, the use of convertibles is not that frequent.

Have you supported a company all the way from startup to exit?

Yes, most recently, 6Wunderkinder. Microsoft acquired the company in June. 6Wunderkinder is responsible for Wunderlist. Wunderlist is a popular cross-platform to-do list app that syncs across devices. The service dovetails nicely with Microsoft’s ambitions of being a services provider for the mobile enterprise.

What advice would you give to a new Founder?

To come to one of my workshops, I am holding at the technical university Berlin (TU Berlin) ?

I am speaking about vesting schemes, ESOP, and other incentive programs, preparation for the first investor, IP transfer, and other 101s.

How can you support Founders through various growth phases?

I can support Founders from starting their company (first set up of documents between the founders, IP transfers to the company), over the operations of the company (terms and conditions, privacy policy, tailor-made contracts with clients and service providers) and financing rounds (from NDA, LOI over term sheets to negotiations and drafting of final investment and shareholders´ agreements) until the exit (SPA, service agreements with the purchaser).

What can you tell us about the Berlin Startup scene?

A little bit of hype, but also a sustainable business.

What differentiates LACORE Rechtsanwälte from other firms?

We are proud to counsel the start-ups, and we are good at it.

Many firms that want to do business in the start-up scene aim at the investors (angels and VCs) because that´s where the money is. So albeit we are also counseling angels and institutional investors too, our main business comes from start-up companies.

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Apart from that, we know the start-up/VC market. Thus, many founders are seeking our advice also for non-legal related questions such as negotiation strategy and valuation. We see many deals and thus, now which deals are offered from investors active in Germany. We use this knowledge in our negotiations.

What can we expect next from your team?

Together with the Berlin start-up/VC scene, we are growing, and thus you will see us supporting the Berlin ecosystem. Furthermore, we offer support and education to startups to help them grow into the next 6Wunderkinder!

Dr. Ingo Schneider of LACORE Rechtsanwälte LLP focuses on corporate law, venture capital, private equity, and M&A. He has advised many clients on national and international corporate transactions and restructuring. In addition, Ingo Schneider advises boards, particularly regarding corporate governance, compliance, and critical shareholders’ meetings. Before joining Lacore, he worked as a lawyer in a major German law firm and a corporate boutique in Berlin. He also worked as a research assistant at the Institute for German and European Business, Competition and Regulatory Law at Freie Universität Berlin. Ingo Schneider studied law at the University of Konstanz, the University of Barcelona (UB) and Freie Universität Berlin. At Freie Universität Berlin he obtained his doctorate.

San Francisco Venture Capital