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Term Sheets are an essential component of fundraising for startups, outlining crucial details of investment agreements and laying the foundation for future partnerships. In a recent webinar hosted by 4thly and Foley & Lardner LLP, legendary Silicon Valley guy Bret Waters teamed up with emerging growth and venture capital lawyers Natasha Allen and Louis Lehot to provide insights into the evolving landscape of Term Sheets for 2024.

Term sheets have undergone significant evolution over time, adapting to changing market dynamics and redefining what is considered as “normal” or “standard” practice. Entrepreneurs and investors will do well to stay informed about these shifts to navigate the fundraising process effectively.

Key Trends in Term Sheets for 2024:

  • Capital Acquisition through Customers: As venture capital funding has become more challenging, one prominent trend in startup financing has been the increasing emphasis on accelerated payment deals with customers. This approach helps companies avoid unnecessary dilution while achieving their growth goals.
  • SAFEs or Convertible Notes: Startups are leveraging instruments like Simple Agreements for Future Equity (SAFEs) and convertible notes to secure financing at every stage of growth, to bridge to a new round or to a sale. These alternatives provide flexibility and allow startups to defer valuation discussions to a later stage. Financing in high resolution means that startups can offer bridge instruments with differing terms concurrently, in order to close investors quickly.
  • Flat or Extension Rounds: To streamline fundraising efforts, companies are exploring flat or “extension” rounds, maintaining a consistent valuation and avoiding complex negotiations surrounding company value.
  • Decreased Venture Debt: Venture debt has seen a decline due to the need for substantial funding runways. Startups are aiming to secure adequate equity capital before resorting to debt financing.
  • Investor-Friendly Terms: Term sheets are increasingly incorporating more investor-friendly terms, such as 2x or 3x liquidation preferences, participating dividends, participating preferences and exit ratchets to attract and accommodate investor demand to protect their upside return as well as their downside.
  • Importance of Legal Counsel: Startups seeking to raise capital should always consult with legal counsel to ensure the parties understand the true cost of capital, anticipate future scenarios, track maturity dates as well as to ensure securities law compliance, protecting the interests of all parties involved.
  • Side Letters: Investors are leveraging side letters to outline unique agreements with startups, we have seen an increased use of side letters in connection with SAFEs as a means for Investors to have access to relevant information to track their investment.
  • Jurisdiction Selection: Most startups will choose to set up their operations in Delaware due to its favorable legal framework. However, an emerging trend is the rise of non-U.S. companies and investors setting up in the Cayman Islands, such as Latin American companies tapping the U.S. capital markets.
  • M&A Activity and Venture Debt Challenges: Experts anticipate continued consolidation in the startup ecosystem, as venture capital firms seek to shore up portfolio companies and draw a line under companies that will be unable to raise funds.
  • Importance of Governance: Recent high-profile governance failures highlight the vital importance of stable, strong and clear legal structures for startups to build trust with shareholders.
  • Pre-Money and Post-Money Considerations: While negotiating a Term Sheet, entrepreneurs should pay close attention to pre-money and post-money differences. Understanding all the nuances is crucial to make informed decisions. Make sure you have a pro forma cap table that maps out multiple scenarios.

In the dynamic world of startup investments, staying up to date with the evolving trends in Term Sheets is essential for entrepreneurs seeking capital and investors looking to maximize returns. The key takeaways from the webinar shed light on the shifting landscape of Term Sheets for 2024, providing valuable insights for startups and investors as they navigate the fundraising process and forge successful partnerships.

Author Natasha Allen

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