In fundraising, it is common for the details in signed term sheets to evolve during the negotiation process. Here are two scenarios:
1. Adjustments to shareholding
Investors may sign a term sheet based on the initial shareholding terms. However, after further negotiation, the founder may offer discounts or adjust the percentage shareholding. In such cases, the signed term sheet reflects the original shareholding terms, not the updated ones.
2. Changes to investment amounts
An investor may decide to increase or decrease their investment after signing the term sheet. While the signed term sheet shows the initial amount, the actual investment amount will be different.
Why this is not a problem
1. Term sheets are non-binding
Term sheets outline proposed terms but are non-binding. Their primary role is to serve as a framework for negotiation, not as a final agreement.
2. Final agreements take precedence
Binding agreements, such as the Articles of Association and Subscription & Shareholders’ Agreement (SSA), supersede the term sheet. These documents reflect the final, agreed terms and are signed by all parties.
3. Avoiding inefficiencies
Continuously updating term sheets for every minor change would cause unnecessary delays and administrative burden - you and your investor could have to change a single term sheet 10 times in a funding round (or more!) and everyone would complain - and rightfully so. Instead, updates are incorporated into the final legal agreements, ensuring accuracy without disrupting the fundraising process.
Term sheets: further reading
We have an article on Toxic Term Sheets
