Term Sheet Analysis

1

Aligning Term Sheets with Investor Concerns

Term Sheets Reflect Investor Concerns

Real or Perceived Flaw Like Term Sheet Provision

Weak management team Fill gaps after closing

Inexperienced advisors Hire CPA/Legal counsel prior to close

Narrow market breadth/depth Expand product/global focus

Customer concentration Covenant to expand base

Lack of IP protection Hire IP counsel after close

Cap table widows/orphans Redeem prior to next round

3rd party/regulatory dependence Legal opinion/3rd party commitment on close

2

Term Sheets Reflect Investor Concerns

Real or Perceived Flaw Like Term Sheet Provision

Excessive compensation Adjust comp. post close

Key employee(s) risk Key-person life insurance

Inexperienced management Board control/advisors/mentors

Technology immaturity Fund in tranches

Investor wants to spread risk Co-investors/syndicate

Technology uncertainties Co-investors/industry experts

Balance sheet obligations Forced conversions of issues

Term Sheets Reflect Investor Concerns

Real or Perceived Flaw Like Term Sheet Provision

IP licensed to company Assignment of IP

Rapidly changing environment Investor approval of key items

Management history of short term employment

Covenants not to compete, employment commitments

Inability to secure long term customer commits

Periodic updates to competitive/SWOT analyses

3

Summary

• If investors have concerns, term sheets will reflect “cures” to address those concerns

• Entrepreneurs must look at the term sheet by “walking a mile in the investors’ shoes”

• If concerns exist for one investor, likely to exist for most sophisticated investors

• Negotiate in good faith