Negotiating the Term Sheet

Part of Angelsbootcamp is getting to work with service professionals who assist Angels in early stage transactions. We are please that Dr. Ingo Schneider of LACORE Rechtsanwälte LLP will be joining us in Berlin to discuss best practices when negotiating a seed stage term sheet. He will work through the ins and outs of term sheets and the basic elements that business angels need to be familiar with.

Dr Ingo Schneider focuses on corporate law, venture capital, private equity and M&A. He has advised many clients on national and international corporate transactions and restructurings. In addition, Ingo Schneider advises boards, in particularly with regard to Corporate Governance, Compliance and critical shareholders’ meetings. Prior to joining Lacore he worked as a lawyer in a major German law firm and a corporate boutique in Berlin. He also worked as a research assistant at the Institute for German and European Business, Competition and Regulatory Law at Freie Universität Berlin. Ingo Schneider studied law at the University of Konstanz, the University of Barcelona (UB) and Freie Universität Berlin. At Freie Universität Berlin he obtained his doctorate.

Negotiating the Term SheetNegotiating the Term Sheet

Recently, we had the chance to talk term sheets and early stage investing with Dr Schneider.

What do Founders care about when it comes to term sheets?

Sometimes it is only the valuation – that is sad as all the other clauses are important as well. But this gives an angel a good opportunity to secure some additional rights.

These may include:

  • preemptive rights – the ability to invest in future rounds to avoid dilution,
  • liquidation preferences – who gets paid what, when.
  • drag along rights – where a simple majority of shareholders can decide to sell the company – This protects all shareholders from, say, one small, stubborn shareholder refusing to sell their shares in an acquisition offer and blocking a deal everyone else wants to see happen.

What do investors want that Founders look to push back on?

Typically, the key point of contention is valuation. Many angel investors have a limited flexibility when it comes to valuations (as they sometimes come from the industry and know that without customers, revenues etc. you don´t have any value at all) – these investors don’t see start-up valuations over 500k as reasonable. But still, it is not industry standard here and seed valuations of over 3M are possible. In the US it´s a lot higher.

Does a seed stage company really need a term sheet, isn’t it going to be renegotiated in the Series A round f financing?

A term sheet helps both Founders and investors to see what deal they are going to close. Of course the deal done in a seed financing is renegotiated later, but some elements will survive.

What are your thoughts Convertible Notes?

Convertibles are a perfect instrument for start-ups and also angel investors. In my practice convertibles are often used, however, in my opinion in the German market the use of convertibles is not that frequently.

Have you supported a company all the way from startup to exit?

Yes, most recently 6Wunderkinder. Microsoft acquired the company in June. 6Wunderkinder is responsible for Wunderlist. Wunderlist is a popular cross-platform to-do list app which syncs across devices. The service dovetails nicely with Microsoft’s ambitions of being a services provider for mobile enterprise.

What advice would you give to a new Founder?

To come to one of my workshops I am holding at the technical university Berlin (TU Berlin) 😉

I am speaking there about vesting schemes, ESOP and other incentive programs, preparation for the first investor, IP transfer and other 101s.

How can you support Founders through various growth phases?

I can support Founders from starting their company (first set up of documents between the founders, IP transfers to the company), over the operations of the company (terms and conditions, privacy policy, tailor made contracts with clients and service providers) and financing rounds (from NDA, LOI over term sheets to negotiations and drafting of final investment and shareholders´ agreements) until the exit (SPA, service agreements with purchaser).

What can you tell us about the Berlin Startup scene?

A little bit of hype, but also sustainable business.

What differentiates LACORE Rechtsanwälte from other firms?

We are proud to counsel the start-ups and we are good at it.

A lot of firms that want to do business in the start-up scene are aiming at the investors (angels and VCs) because that´s were the money is. Albeit we are also counseling angels and institutional investors, too, our main business comes form the start-up companies.

Apart from that, we know the start-up/VC market, thus a lot of founders are seeking our advice also for non legal related questions such as negotiation strategy, valuation. We see a lot of deals and thus, now which deals are offered from investors active in Germany. We use this knowledge in our negotiations.

What can we expect next from your team?

Together with the Berlin start-up/VC scene we are growing and thus you will see us supporting the Berlin ecosystem. We offer support and education to startups to help them grow into the next 6Wunderkinder!

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