Harm De Vries - Venture Capital Deal Terms: A guide to negotiating and structuring venture capital transactions

Venture capital has established itself as an important source of capital for a variety of companies, ranging from start-ups to more established businesses. Consequently, the number of people who are at some point in their career involved in a venture capital transaction, is steadily increasing. While some people involved in venture capital transactions have extensive experience in this area, the knowledge of others is at best rudimentary. Entrepreneurs in whose company a venture capitalist will invest, lawyers working in this field for the first time, and even junior venture capitalists and angel investors often lack the full understanding of all aspects of venture capital financing required to ensure a successful transaction.

The purpose of this book is to provide a clear understanding of the most frequently used practices, terms and conditions to those with less than extensive experience in venture capital transactions. We believe, however, that this book will also serve as a valuable reference guide for the more experienced venture capitalist.

Practically all venture capital transactions start out with the execution of a term sheet. A term sheet is a document summarising the basic terms and conditions under which investors are prepared to make an investment. It also sets out the structure of the transaction, the parties involved, the timelines for due diligence and the deadline for the closing. A well-drafted term sheet serves as a tool to focus attention of the parties on the essential elements of the investment, and as an instrument to investigate whether there is common ground between the parties regarding the most important investment conditions, before they spend further time, energy and money on negotiating a deal. A term sheet covers the main aspects of a venture capital financing and facilitates the execution of the final transaction documentation.

Effective participation in the negotiations regarding the term sheet is possible only once each party involved fully understands the scope of the terms included in the term sheet (including the commercial implications thereof) and the information it contains, and the alternatives to the terms in use. Moreover, a clear understanding of such terms is likely to expedite the negotiation of the term sheet and completion of the investment process. We hope this book will be of assistance in gaining such an understanding, to the benefit of all parties concerned.