Demystifying the Venture Capital Term Sheet

Raising capital for an emerging biotech company is rarely easy.  Tremendous time and effort goes into crafting the perfect story, determining the amount of capital you need to raise and what that money will be used for and reaching out to investors.  It can be a long and arduous process.  In fact, my colleague Chris Ehrlich recently hosted a webinar discussing the capital raising process and trends within the industry, which you can access here.

So now you have done all of that work and you have an investor interested in providing you the capital you are seeking to further the development of your company.  You breathe a huge sigh of relief and are ready to take a victory lap since the hard part seems done – all that’s left is the amount and what percent of the company the investor seeks in return, right?  However, soon you receive a 5-8 page term sheet that includes things you never really encountered or maybe thought of before, such as protective provisions, liquidation preferences, anti-dilution protection, board representation, registration rights, and a host of other terms that perhaps are both foreign and/or overwhelming.

Financing term sheets have distinct differences from a term sheet for a license or an acquisition.  The latter are fairly easy to understand and are geared towards answering who will be paid what and who has responsibility for what going forward.  Financing term sheets, however, take some getting used to.  Looking beyond the pre-money, why is an investor asking for a certain right?  How do the rights they are receiving operate in reality and how will they potentially impact management and the founders in the future?  These are the two key questions that need to first be understood before term sheets can be fairly analyzed and compared.

Before responding to any term sheet, we would recommend two key steps: First, engage well-qualified legal counsel with experience doing private company financings in the life sciences industry.  Second, spend some time understanding each term in a term sheet so you can determine what your position should be with respect to each item.

At the most basic level, every term in a term sheet falls into one of two categories: economics and control.  “Economic” terms are those that govern what happens in the event the company is looking to make a distribution to the stockholders, issue additional equity or there is a liquidation event.  “Control” terms are those that govern what input the investor has regarding the company either seeking to take or being forced to take certain actions.

On Tuesday, October 17 I will be leading a webinar where I will discuss each term in a venture financing term sheet and provide some real-world context behind why a term is included and what is typical in a final negotiated financing.  We will also be able to answer any questions you have either from your own personal experience or to further your own understanding.  Our goal is to ensure that you will come out of the webinar with at least a greater appreciation for why investors insist on certain items and how to effectively complete a financing involves significant more than a negotiation over the valuation.

You can sign up for the webinar using the link below:

 Written by Andy Meyerson