• December 2019
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Negotiating a Venture Debt Term Sheet

lawtrades negotiate term sheet papers

In order to get your startup “up and running” you are almost certainly going to require some financing. While some startup founders prefer to navigate the process of equity rounds and others choose to solicit micro financing or crowdfunding, many find that securing a loan or credit is the most straightforward path to initial success. This option may seem particularly attractive to you if your startup will require a significant amount of startup capital and/or is unlikely to be “splashy” enough to attract many crowdfunding backers.

Negotiating an investment term sheet is faster, cheaper and more effective than negotiating the loan agreement. So, assuming you will be working with a attorney on the loan, you should consult your attorney to help you negotiate the loan term sheet.

If you secure a loan with a venture capital firm, the proposed terms of your loan will initially be laid out in a venture term debt sheet. Once you receive this proposal, you and your attorney will be able to formally negotiate any terms that seem unfair, confusing or unreasonable.

Once the terms of a loan are clearly determined, you can turn your attention back to the practical realities of starting a company. You can discuss incorporation with your attorney, begin seeking candidates for employment within your business, scout premises and ultimately commence operations. But first, you must negotiate the terms of your financing. And this task can be tricky.

The Value of Venture Term Debt Sheets

When venture debt lenders interested in investing in your startup present you with a term sheet, you may feel overwhelmed. That reaction is entirely understandable, as these sheets tend to be frustratingly complex. As your term sheet will lay the groundwork for your future loan documentation, it is necessarily detailed and dense with legal vocabulary. Thankfully, you do not need to navigate this process alone. Speaking with an attorney experienced in startup investor contracts will help you to ensure that you secure a loan that is fair. Speaking with an attorney will also help to unscramble any unfamiliar terminology or foreign-looking figures.

In general, loan documentation drawn up by venture debt lenders simply reflect a term sheet in more detail. As a result, understanding this sheet is critically important. As you may be paying off your startup financing for years, this venture debt term sheet will lay the foundation for your financial relationship with your lender.

The Nitty Gritty

One of the key elements of your venture debt term sheet is the specification of exactly what kind of loan you may be agreeing to and what its key components are. Some loans exist for the span of a specified term, while others indicate an available revolving line of credit. Still other loans are hybrids of these two primary forms. Understanding the type of loan offered will help you to make proactive financial decisions when determining how to invest the fruits of the loan and any profit your startup may generate before the loan is paid in full.

Similarly, the term sheet will likely outline details involving interest, the maturity date and terms of the credit and any assets that may need to be identified in order to formally secure the loan. On the lender’s side of things, the venture debt term sheet will dictate how much funding will be provided, when it will be provided and details related to any warrants affected by the contract.

Need Assistance? No Problem.

The experienced team at LawTrades can easily aid you in negotiating your venture debt term sheet. If you have questions about the process required to finance your startup, please do not hesitate to reach out today.