Search Results for: term sheet

[Below is the text of a WSGR email update.]

Always looking for ways to better serve the entrepreneurial community, Wilson Sonsini Goodrich & Rosati is pleased to announce the release of the WSGR Term Sheet Generator, a publicly available online tool that allows entrepreneurs and investors to generate an initial draft of a term sheet for a preferred stock financing. By answering a series of questions, users are guided through the principal variables contained in a venture financing term sheet. Brief explanations of the questions and typical deal terms are included. After answering as many questions as desired, users can generate, print, and save a Word version of the term sheet, which is intended to be useful in deal discussions between entrepreneurs and investors and in crafting a final, customized term sheet with the help of attorneys.

The term sheet generator is another example of the firm’s commitment to providing services to our clients more quickly and efficiently. Our attorneys use a more extensive version of the tool to generate initial drafts of documents for Series A preferred stock financings, including Certificates of Incorporation, Preferred Stock Purchase Agreements, Investor Rights Agreements, Right of First Refusal and Co-sale Agreements, Voting Agreements, corporate approvals, and closing documents. By using this tool, we believe that we are able to represent clients and complete transactions more efficiently. We also have a similar tool for generating initial drafts of more than 20 start-up company formation documents. In addition to document automation, Wilson Sonsini Goodrich & Rosati has developed other sophisticated knowledge management and related resources that enable our attorneys to better serve clients by tapping the essential expertise and experience of the entire firm.

Users with general comments regarding the WSGR Term Sheet Generator should contact partner Yoichiro (Yokum) Taku at ytaku@wsgr.com or Practice Resources Special Counsel Anthony Kikuta at akikuta@wsgr.com. To learn more about Wilson Sonsini Goodrich & Rosati’s entrepreneurial services, please click here.

[Update:  See below for various mentions of the term sheet generator.]

Altgate:  Law Firm Wilson Sonsini Now Preparing Term Sheets For Free (Furqan Nazeeri provides a review of the tool along with a sample term sheet that he created.)

Mendelson’s Musings: Wilson Sonsini Term Sheet Generator

Legal Blog Watch: Law Firm Replacing Itself With Free Term Sheet Generator

Guy Kawasaki:  Free Online Term Sheet Generator

WSJ Blogs: The Daily Startup: Putting Terms in Entrepreneurs’ Hands

ABA Journal: Wilson Sonsini Offers Free Document Assembly Tool

Adams Drafting:  The WSGR Term Sheet Generator: The Inoxerable Creep of Document Assembly

Prism Legal: New WSGR Term Sheet Generator – an Innovative Online Service

Law Shucks:  WSGR Term-Sheet Generator

Startup CFO:  Automatic Term Sheet Generator

The Startup Lawyer:  WSGR Launches Term Sheet Generator

VC Confidential: Term Sheet Tool

CenterNetworks:  Wilson Sonsini Launches Free Term Sheet Generator

Strategize:  Wilson Sonsini Term Sheet Generator

Sophisticated Finance:  Wilson Sonsini Term Sheet Generator

Kentucky Startup Blog: Term Sheet Generator

Steven Cox: Need a Venture Capital Term Sheet?  Here’s a FREE One

Legal Process Outsourcing:  Have Wilson Sonsini Read “The End of Lawyers?”

Barron’s:  For the Startup with No Money to Pay Pricey Lawyers:  Wilson Sonsini’s Do-It-Yourself Term Sheet Generator

Reuters:  Free financing tool to help startups get legal ball rolling

Reuters:  Hoopla over automated term sheet may be legit

WSJ Law Blogs:  Wilson’s Little Gift to the World

Xbusinessman:  WSGR term sheet generator (in Japanese)

The Lean Marketer: Online Term Sheet Generator for Venture Capital Funding

Venture funds do not want their term sheets disclosed to other potential investors in order to avoid the deal terms being shopped. Below is a typical term sheet provision.

[Confidentiality: Until the initial closing of the financing contemplated by this Memorandum of Terms, the existence and terms of this Memorandum of Terms shall not be disclosed to any third party without the consent of the Company and the lead investor(s), except as may be (i) reasonably required to consummate the transactions contemplated hereby or (ii) required by law.]

Please keep in mind that venture funds typically do not sign non-disclosure agreements. Therefore, the confidentiality provision in a term sheet is not binding until it is signed by both sides. However, I suppose that venture funds need to trust companies not to disclose unsigned term sheets in the same way that companies trust venture funds to not disclose business plans.

Almost all term sheets provide that they are not binding, except for certain provisions regarding exclusivity, confidentiality and/or expenses (all of which I will cover in a later post) depending on the term sheet. An investor can refuse to complete the financing at any time if the term sheet isn’t binding. I’ve heard of many situations where a company had a signed term sheet and the financing never occurred. A company has very little practical recourse if a venture fund fails to complete a financing after signing a non-binding term sheet. However, there is a California case that held that a document intended to outline the terms of a proposed transaction may impose a duty to negotiate in good faith on the parties.

CONFIDENTIAL

[NAME OF ISSUER]

MEMORANDUM OF TERMS

[Except with respect to the provisions entitled [“Exclusive negotiations“] [and] [“Confidentiality“], which are intended to be, and are, legally binding agreements among the parties hereto, this] [This] Memorandum of Terms represents only the current thinking of the parties with respect to certain of the major issues relating to the proposed private offering and does not constitute a legally binding agreement. This Memorandum of Terms does not constitute an offer to sell or a solicitation of an offer to buy securities in any state where the offer or sale is not permitted.

THE OFFERING

Issuer:  [__________], a [Delaware] corporation (the “Company“)

Securities:  Series [A] Preferred Stock (the “Preferred”)

Valuation of the Company:  $[__________] pre-money

Amount of the offering:  $[__________]

Number of shares:  [__________] shares

Price per share:  $[__________]

Investor(s):  [__________] or its affiliated entities (the lead investor(s)), [__________] and other investors acceptable to the Company.

Capitalization:  See Exhibit A for the pre-financing capitalization of the Company [and the pro forma capitalization following the proposed offering].

Anticipated closing date:  Initial closing on or before [__________], with one or more additional closings within [60] days thereafter.

TERMS OF THE PREFERRED

Dividends:  Non-cumulative dividends at an annual rate of 8% of the purchase price per share in preference to the common stock, when and if declared by the board. Any dividends in excess of the preference will be paid to the common stock.

Liquidation preference:  In the event of a liquidation, dissolution or winding up of the Company, the Preferred will have the right to receive the original purchase price plus any declared but unpaid dividends prior to any distribution to the common stock. The remaining assets will be distributed pro rata to the holders of Preferred and the holders of common stock on an as-converted basis[, provided that the total amount distributed to the Preferred (including the initial liquidation preference) will be limited to [__________] times the initial liquidation preference]. A sale of all or substantially all of the Company’s assets or a merger or consolidation of the Company with any other company will be treated as a liquidation of the Company.

Redemption:  The Preferred will not have redemption rights.

Conversion:  The Preferred may be converted at any time, at the option of the holder, into shares of common stock. The conversion rate will initially be 1:1, subject to anti-dilution and other customary adjustments.

Automatic conversion:  Each share of Preferred will automatically convert into common stock, at the then applicable conversion rate, upon (i) the closing of a firmly underwritten public offering of common stock at a price per share that is at least [three] times the purchase price of the Preferred with gross offering proceeds in excess of $[__________] million (a “Qualified Public Offering“), or (ii) the consent of the holders of at least [50]% of the then outstanding shares of Preferred.

Anti-dilution:  The conversion price of the Preferred (which will initially equal the purchase price of the Preferred) will be subject to adjustment, on a broad-based weighted average basis, if the Company issues additional securities at a price per share less than the then applicable conversion price.

There will be no adjustment to the conversion price for issuances of (i) shares issued upon conversion of the Preferred; (ii) shares or options, warrants or other rights issued to employees, consultants or directors in accordance with plans, agreements or similar arrangements, but not to exceed a total of [__________] shares issued after the closing date [or such greater number as unanimously approved by the board]; (iii) shares issued upon exercise of options, warrants or convertible securities existing on the closing date; (iv) shares issued as a dividend or distribution on Preferred or for which adjustment is otherwise made pursuant to the certificate of incorporation (e.g., stock splits); (v) shares issued in connection with a registered public offering; (vi) shares issued or issuable pursuant to an acquisition of another corporation or a joint venture agreement approved by the board; (vii) shares issued or issuable to banks, equipment lessors or other financial institutions pursuant to debt financing or commercial transactions approved by the board; (viii) shares issued or issuable in connection with any settlement approved by the board; (ix) shares issued or issuable in connection with sponsored research, collaboration, technology license, development, OEM, marketing or other similar arrangements or strategic partnerships approved by the board; (x) shares issued to suppliers of goods or services in connection with the provision of goods or services pursuant to transactions approved by the board; or (xi) shares that are otherwise excluded by consent of holders of a majority of the Preferred.

General voting rights:  Each share of Preferred will have the right to a number of votes equal to the number of shares of common stock issuable upon conversion of each such share of Preferred. The Preferred will vote with the common stock on all matters except as specifically provided herein or as otherwise required by law.

Voting for directors:  [So long as [__________]% of the Preferred is outstanding, the] [The] holders of Preferred will be entitled to elect [two] director[s]. The holders of common stock will be entitled to elect [two] director[s]. The remaining director(s) will be elected by the holders of Preferred and common stock voting together.

Protective provisions:  So long as [any] of the Preferred is outstanding, consent of the holders of at least [50]% of the Preferred will be required for any action that (i) alters any provision of the certificate of incorporation [or the bylaws] if it would [adversely] alter the rights, preferences, privileges or powers of or restrictions on the preferred stock or any series of preferred; (ii) changes the authorized number of shares of preferred stock or any series of preferred; (iii) authorizes or creates any new class or series of shares having rights, preferences or privileges with respect to dividends or liquidation senior to or on a parity with the Preferred or having voting rights other than those granted to the preferred stock generally; (iv) approves any merger, sale of assets or other corporate reorganization or acquisition; (v) approves the purchase, redemption or other acquisition of any common stock of the Company, other than repurchases pursuant to stock restriction agreements approved by the board upon termination of a consultant, director or employee; (vi) declares or pays any dividend or distribution with respect to the [preferred stock (except as otherwise provided in the certificate of incorporation) or] common stock; [or] (vii) approves the liquidation or dissolution of the Company[; (viii) increases the size of the board;] [(ix) encumbers or grants a security interest in all or substantially all of the assets of the Company in connection with an indebtedness of the Company;] [(x) acquires a material amount of assets through a merger or purchase of all or substantially all of the assets or capital stock of another entity;] [or (xi) increases the number of shares authorized for issuance under any existing stock or option plan or creates any new stock or option plan].

INVESTOR RIGHTS

Information rights:  The Company will deliver to each holder of at least [500,000] shares of Preferred, (i) [un]audited annual financial statements within [90] days following year-end, (ii) unaudited quarterly financial statements within [45] days following quarter-end, (iii) unaudited monthly financial statements within [30] days of month-end, and (iv) annual business plans. The information rights will terminate upon an initial public offering.

Registration rights:

Registrable securities. The common stock issued or issuable upon conversion of the Preferred will be “Registrable Securities.”

Demand registration. Subject to customary exceptions, holders of at least [50]% of the Registrable Securities will be entitled to demand that the Company effect up to [two] registrations (provided that each such registration has an offering price of at least $[10.00] per share with aggregate proceeds of at least $[20] million) at any time following the earlier of (i) [five] years following the closing of the financing and (ii) 180 days following the Company’s initial public offering. The Company will have the right to delay such registration under certain circumstances for [up to] [two] period[s] of up to [90] days [each] in any twelve month period.

“Piggyback” registration. The holders of Registrable Securities will be entitled to “piggyback” registration rights on any registered offering by the Company on its own behalf or on behalf of selling stockholders, subject to customary exceptions. In an underwritten offering, the managing underwriters will have the right, in the event of marketing limitations, to limit the number of Registrable Securities included in the offering, provided that, in an offering other than the initial public offering, the Registrable Securities may not be limited to less than [25]% of the total offering. In the event of such marketing limitations, each holder of Registrable Securities will have the right to include shares on a pro rata basis as among all such holders and to include shares in preference to any other holders of common stock.

S-3 rights. Subject to customary exceptions, holders of Registrable Securities will be entitled to an unlimited number of demand registrations on Form S-3 (if available to the Company) so long as those registered offerings are each for common stock having an aggregate offering price of not less than [$1,000,000]. The Company will not be required to file more than [two] such Form S-3 registration statements in any twelve month period.

Expenses. Subject to customary exceptions, the Company will bear the registration expenses (exclusive of underwriting discounts and commissions) of all demand, piggyback and S-3 registrations, provided that the Company will not be required to pay the fees of more than one counsel to all holders of Registrable Securities.

Termination. The registration rights of a holder of Registrable Securities will terminate on the earlier of (i) such date, on or after the Company’s initial public offering, on which such holder may immediately sell all shares of its Registrable Securities under Rule 144 during any 90-day period and (ii) [three] years after the initial public offering.

Market stand-off. Holders of Registrable Securities will agree not to effect any transactions with respect to any of the Company’s securities within 180 days following the Company’s initial public offering[, provided that all officers, directors and 1% stockholders of the Company are similarly bound].

Other provisions. The Investor Rights Agreement will contain such other provisions with respect to registration rights as are customary, including with respect to indemnification, underwriting arrangements and restrictions on the grant of future registration rights.

Right to maintain proportionate ownership:  Each holder of at least [500,000] shares of Preferred will have a right to purchase its pro rata share of any offering of new securities by the Company, subject to customary exceptions. The pro rata share will be based on the ratio of (x) the number of shares of Preferred held by such holder (on an as-converted basis) to (y) [the Company’s fully-diluted capitalization (on an as-converted and as-exercised basis)]. [Participating holders will have the right to purchase, on a pro rata basis, any shares as to which eligible holders do not exercise their rights.] This right will terminate immediately prior to the Company’s initial public offering [or five years after the financing].

Right of first refusal and co-sale agreement:  In the event [__________] proposes to transfer any Company shares, the Company will have a right of first refusal to purchase the shares on the same terms as the proposed transfer.

If the Company does not exercise its right of first refusal, holders of Preferred will have a right of first refusal (on a pro rata basis among holders of Preferred) with respect to the proposed transfer. [Rights to purchase any unsubscribed shares will be reallocated pro rata among the other eligible holders of Preferred.]

To the extent the rights of first refusal are not exercised, the holders of Preferred will have the right to participate in the proposed transfer on a pro rata basis (as among the transferee and the holders of Preferred).

The rights of first refusal and co-sale rights will be subject to customary exceptions and will terminate on an initial public offering.

[“Drag–along” right:  Subject to customary exceptions, if holders of [50]% of the Preferred approve a proposed sale of the Company to a third party (whether structured as a merger, reorganization, asset sale or otherwise), [__________] will agree to approve the proposed sale. This right will terminate upon a Qualified Public Offering.]

Board representation:  [The principal stockholders of the Company will agree to elect to the board [__________] representative[s] of [__________], [__________] representative[s] of [__________] and [__________] mutually agreeable person[s].] The directors will be entitled to customary indemnification from the Company and reimbursement of reasonable costs of attendance at board meetings.

EMPLOYEE MATTERS

Vesting of founder shares:  Shares and options held by [__________] will be subject to [four-year vesting], with [25]% vesting on the first anniversary of [the commencement of services] and the remainder vesting [monthly] thereafter. The Company will have the right, upon termination of services, to repurchase any unvested shares.

Vesting of employee shares:  Subject to the discretion of the board, shares and options issued to employees, directors and consultants will be subject to [four-year vesting], with [25]% vesting on the first anniversary of the commencement of services and the remainder vesting [monthly] thereafter. The Company will have the right, upon termination of services, to repurchase any unvested shares.

Proprietary information agreements:  The Company will have all employees and consultants enter into proprietary information and inventions agreements in a form reasonably satisfactory to the investors.

[“Key person” life insurance:  The Company will obtain a “key person” life insurance policy on [__________] in the amount of $[__________], with proceeds payable to the Company.]

OTHER MATTERS

Legal fees and expenses:  The Company will pay the reasonable fees and expenses of a single counsel to the investors [up to a maximum of $[__________]].

[Exclusive negotiations:  From the date of the execution of this Memorandum of Terms until the earlier of (i) [__________], (ii) notice of termination of negotiations by the lead investor(s) and (iii) the initial closing of the financing contemplated by this Memorandum of Terms, neither the Company nor any of its directors, officers, employees or agents will solicit, or participate in negotiations or discussions with respect to, any other investment in, or acquisition of, the Company without the prior consent of the lead investor(s). [The lead investor(s) consent to the Company soliciting, and participating in negotiations and discussions with, [__________].]

[Confidentiality:  Until the initial closing of the financing contemplated by this Memorandum of Terms, the existence and terms of this Memorandum of Terms shall not be disclosed to any third party without the consent of the Company and the lead investor(s), except as may be (i) reasonably required to consummate the transactions contemplated hereby or (ii) required by law.]

Conditions precedent:  The investment will be subject to customary conditions, including but not limited to:

Completion of due diligence to the satisfaction of the investors;

Negotiation and execution of definitive agreements customary in transactions of this nature;

Receipt of all required authorizations, approvals and consents;

Delivery of customary closing certificates [and an opinion of counsel for the Company]; and

The absence of material adverse changes with respect to the Company.

(Signature page follows)

This Memorandum of Terms may be executed in counterparts, which together will constitute one document. Facsimile signatures shall have the same legal effect as original signatures.

Y Combinator recently published forms of Series AA equity financing documents that YC portfolio companies have used when raising angel financing.  YC provides a three month startup program for entrepreneurs twice a year in Cambridge, MA and Mountain View, CA.  YC typically provides $5K plus $5K per founder of seed funding for usually 6% of the equity in common stock (which, as an aside, Sarah Lacy seems to question, but in my mind seems like something that I would jump at if I were a fledgling entrepreneur).

[Disclaimer/disclosures:  Please read the disclaimer on the documents and on my website.  I write this blog in my personal capacity and my opinions may differ from my colleagues.  WSGR represents Y Combinator and many of its portfolio companies.  I represent a YC portfolio company that provides the Chatterous application and have worked with Y Combinator founder Trevor Blackwell’s company Anybots.  I have also represented investors that have invested in a couple of YC portfolio companies.  I may update this post in the future.]

I was planning to write a post on the differences between angel financing terms and venture capital financing terms, and thought that the YC documents provided a good opportunity to explain the differences.  I’ve already noticed some commentary about the documents and decided to provide some more detailed explanations and the situations that they might be used.

If you want to review annotated Series A venture capital financing documents, please review the NVCA model venture capital financing documents.  (Please note that I think that the default provisions in the NVCA documents are generally fairly investor-favorable and reflect east coast practice rather than Silicon Valley practice.  I will probably write a post about these documents at some point in the future.)  This post assumes that you have a basic understanding of Series A financing terms.  If you don’t, please educate yourself on this site, Venture Hacks and the term sheet series by Brad Feld/Jason Mendelson, among other places.

What situations should these documents be used in?

The YC documents are probably fine in situations where the investor (i) wishes to purchase equity rather than convertible debt, (ii) is otherwise somewhat indifferent on terms other than percentage ownership of the company, liquidation preference and right of first offer in future financings, (iii) is investing at a fairly low valuation (i.e. a couple of million dollars), and (iv) is only investing a small amount (i.e. a couple hundred thousand dollars or less).

In my experience, sophisticated angel investors expect to receive a full set of Series A documents with rights essentially the same as venture capital investors, so the Series AA documents may not be acceptable in these situations.  I think these documents are most appropriate in a friends and family equity seed financing.  However, I believe that companies are generally better off with convertible debt rather than an equity financing at a low valuation.

Why is it called Series AA?

To differentiate it from typical “Series A” preferred stock, which comes with certain expectations with regard to rights.  I’ve had clients rename their Series A, B and C to Series A-1, Series A-2 and Series A-3, so that their first institutional venture capital financing was called the Series B.  There is no real rule to what a particular series of preferred stock is called (i.e. Series FF for the Founders Fund invention).  I suppose that YC could have named it Series YC, instead of Series AA, for better branding.

What rights does the Series AA have in the sample YC documents?

Obviously, please read the term sheet. The primary rights in these documents, ranked in order of importance in my opinion are:

• Non-participating preferred liquidation preference.  The investor receives their money back and the remainder goes to the common.  According to WSGR’s survey of venture financings, a non-participating preferred is in around 40% of financings, with the liquidation preference in the remainder of deals being more investor-favorable.

• Limited protective provisions.  Among other things, the company can’t be sold without consent of a majority of the Series AA.

• Right of first offer on future financings.  Please note that these documents provide that the right of first offer expires five years after the financing, which I believe is not standard (but happens to be the company-friendly default in the WSGR form of documents that the Series AA documents were based on).

• Information rights.  The investor receives unaudited annual and quarterly financial statements.

There are situations where an investor might receive stock with even less rights.  For example, if a founder contributes a significant amount of cash (i.e. enough to buy a car) to fund the company, then I might suggest that the company issue preferred stock with a liquidation preference and no other rights to the founder, as opposed to issuing common stock.  The reason for issuing preferred stock instead of common stock is to preserve a low common stock value for option grants as explained in this post, and providing the stock with a liquidation preference.

What are the primary rights that are missing from the these documents that a VC or sophisticated angel would expect?

Some people have suggested that various terms are unnecessary in early stage Series A financings.  See the VentureBeat article titled “Reinventing the Series A.”  In the sample YC documents, there are various terms that are missing that one would typically expect in a company-friendly Series A term sheet (i.e. one from Sequoia Capital).

• Dividend preference.  Deleting the dividend preference is not a big deal, as almost all startup companies don’t declare dividends.  The only practical situation that I can think of where a dividend preference is beneficial to a stockholder is where a company does a partial sale of assets and wishes to distribute the proceeds to stockholders. The liquidation preference would not apply in this situation, and any distribution to stockholders would trigger the dividend preference.

• Registration rights.  As a practical matter, I don’t think that most investors should really care about registration rights, especially in light of the shortening of the Rule 144 holding period to 6 months.  (I suppose I will write a boring post about Rule 144 at some point.)

• Anti-dilution protection.  Deleting anti-dilution rights saves several pages of text in the Certificate of Incorporation. Given that the Series AA is issued at a fairly low valuation, anti-dilution protection is probably not that important, as a “down round” from a low valuation in the Series AA is unlikely.

• Comprehensive protective provisions.  The YC documents are fairly light on protective provisions compared to a typical Series A financing.

• Right of first refusal and co-sale.  These rights are missing.  This is probably okay assuming that the founders restricted stock purchase agreement has a right of first refusal on transfers until a liquidity event.  The right of first refusal on founder stock transfers in a typical restricted stock purchase agreement is in favor of the company.  (Please note that when I say typical, I mean an agreement drafted by attorneys experienced in venture financings, not the boilerplate you might get from an online incorporation service.)  The typical RFR/co-sale agreement in a venture financing gives the investors a right to purchase the shares if the company does not exercise its right.

• Voting agreement.  An optional bracketed provision in the Certificate of Incorporation provides for a Series AA board seat.  In a typical venture financing, there would also be a voting agreement that governs how specific board seats will be filled.  In angel financings, I typically eliminate the voting agreement anyway and simply have a closing condition that the board consist of certain persons.

• Comprehensive representations and warranties.  The Series AA Preferred Stock Purchase Agreement has fairly limited reps and warranties.  As a practical matter, investors don’t sue companies for a breach of reps and warranties, so reps and warrants basically serve to flush out diligence issues.  In an early stage company, extensive reps and warranties are probably unnecessary.

• Legal opinion.  A company counsel legal opinion is missing in these documents.  A legal opinion for a newly-incorporated early stage company probably doesn’t add much to the due diligence process and is probably unnecessary compared to the incremental cost to prepare.

• Legal fees.  Each side pays its own legal fees in these documents.  Venture funds expect the company to pay investor counsel fees.

Do I need an attorney to help me complete a financing if I have these documents?

Yes.  Absolutely.  These documents are not intended to be “fill in the company name,” sign the docs and collect checks/wire transfers.  The fact that certain rights were intentionally omitted from the documents compared to typical VC financing documents is a judgment call that requires the guidance of an experienced attorney. There are always various corporate housekeeping matters that need to be cleaned up in connection with a financing.  Please don’t try to use the YC documents without working with a competent attorney.

Venture funds often include a binding no shop, or exclusivity, provision in a term sheet. Below is a typical term sheet provision.

[Exclusive negotiations: From the date of the execution of this Memorandum of Terms until the earlier of (i) [__________], (ii) notice of termination of negotiations by the lead investor(s) and (iii) the initial closing of the financing contemplated by this Memorandum of Terms, neither the Company nor any of its directors, officers, employees or agents will solicit, or participate in negotiations or discussions with respect to, any other investment in, or acquisition of, the Company without the prior consent of the lead investor(s). [The lead investor(s) consent to the Company soliciting, and participating in negotiations and discussions with, [__________].]

Whether a no shop is included in the term sheet and the time period of the no shop are subject to negotiation. Venture funds may insist on a no-shop of 45 to 60 days in order to complete due diligence and legal documentation for the financing. The rationale for the no shop is that the fund does not want to expend the time and resources on additional due diligence and legal fees if the company will continue “shopping” the deal.  If companies are unsuccessful at removing the no shop from the term sheet, they may try to limit the time period to 30 days or less. In my experience, most venture financings seem to take more than three weeks from term sheet signing to closing.

Companies may want to negotiate carve outs from the term sheet to allow for discussions with existing investors, banks, and specific other co-investors.