The term sheet and negotiating with investors

Equity investment involves a partnership and is temporary, since from the outset the investor and entrepreneur know it will eventually come to an end. Although the term sheet is the key document to be negotiated, the parties will first define and exchange various pieces of information and reach an agreement about both day-to-day and medium to long-term behaviours. Second, they must commit to working together and to complete transparency when managing any agency problems that arise. The end goal of the investor and the shareholders of the company is always the same: the creation of value. This issue divides successful operations from failures, allowing the investor and company to achieve the expected returns. Although they have a common goal, they may have differing views on many aspects of the business. Conflict typically arises, for example, over the duration of investor involvement, the strategies used to increase company value, financial and industrial alliances and new opportunities that modify the pre-investment situation. Both the investor and the entrepreneur will try to solve all potential disagreements before the decision is taken to invest and to partner together; however, it is impossible to forecast the future and legislate for every eventuality. Conflicts may also arise because the investor has his own portfolio to manage with constraints arising from the IRR objective, the residual maturity, the regulatory capital and covenants settled between the fund’s originators. On the other side, the venture-backed company and the shareholders will have their own strategic, financial and personal goals that may differ from those of the investor.