I’ve had the pleasure to be very busy with a client looking to raise a 9-figure sum for his overseas biofuels installations. It goes without saying (but I’ll say it anyway) that we still are in the midst of tight money conditions. Nonetheless, I was able to find a European investor who was interested and in March of 2009, we saw a term sheet.
Well, my work here is done. Not really! It took the remainder of the Spring and all Summer to get to a signed agreement, an agreement that formally laid out under what conditions actual money would be invested and for construction to begin.
Perhaps this is a good place to stop and back up a bit. What, exactly, is a term sheet?
A term sheet is a letter of intent to invest in a company or project created by the prospective investor. It is usually not legally binding or only has a small part that is legally binding. It does set out the general expectations of the investor, the funds they want to put in, what they expect to get for those funds and the conditions under which they will release the money to the entrepreneur.
In the case of technology companies seeking venture investment, the term sheet is mostly about the valuation and special rights that the investor would get. The conditions for release of funds are mostly driven by confirmation of assertions made by the company and the development of the legally binding agreements.
Project investment term sheets (like the one that my client has) are of similar complexity on the valuations but rather than validating facts about the company, conditions on release of funds often include more hurdles that must still be met.
Every deal will be different and every investor can have different hurdles that he MUST see cleared before writing the first check. The most common topics of “must have” items to release funds are:
- Site control of the land for the project
- Fully negotiated power purchase/off-take agreements
- Long-term feedstock agreements
- Independent feasibility study
- Key permits and/or local government letter of no impediments
- EPC contract
- Major component purchase agreements
- Technology license
If they are complicated but aren’t legally binding, why bother with a term sheet at all? It is a compromise. Not every offer to invest is accepted. The comprehensive legal documents require both time and often six-figures worth of legal expenses. As an investor, you just don’t want to sink those kinds of resources into a deal only to find some insurmountable disagreement with the developer.
The goal of the term sheet is to describe the proposed deal in sufficient detail and clear enough language to give both sides the confidence that comprehensive legal documents describing this deal will be signed.
So how hard should a project developer negotiate on a term sheet offer? First off, remember it is still a term sheet, not the full legal document set. Not every issue will be solved or every cost enumerated. Getting a legal review is always wise. Just don’t let the lawyers try to rewrite the document or turn it into legally binding agreements. You can burn up a lot of precious money (that you may not have) by letting the lawyers run free at this stage. It is completely fair however, to push back on the big issues-ownership splits, voting rights, management structure and compensation to the development team.
Most investor groups that I know are limited by their own manpower in how many deals that they can do and oversee in a given year. An offer of a term sheet to a project developer is a strong endorsement of their belief in that project. But they need to know if they can reach an agreement on terms that they will find satisfactory.
How hard of a negotiating position you can take with the prospective investor will be determined by several things: the other opportunities that the investor has, how highly they think of your compant or project AND what alternatives you as the entrepreneur have to this investor’s money.
While every deal is in deed different, one rule holds true for negotiating all term sheets, a smaller percentage of something is worth more than one hundred percent of nothing.