December 7, 2023

Negotiating a Term Sheet - 5 Tips from Cascade

Mark Bruny
Negotiating a Term Sheet - 5 Tips from Cascade

Navigating the world of private debt can be a daunting task, especially for first-time entrepreneurs. One of the steps in this journey is negotiating a term sheet, an agreement that outlines the key terms, pricing, and structure of a private debt deal. 

While the term sheet may seem non-committal (it could be either), it's essential to approach the negotiation process with caution and a clear understanding of your company's needs and goals. Here I present 5 tips for negotiating a Term Sheet. 

Take A Win-Win Approach

Remember, a successful investment deal should be mutually beneficial for both parties involved. Avoid striving for a one-sided victory, as this can set the stage for future conflicts and ultimately lead to the failure of the transaction. Approach the negotiation as a collaborative process, not an adversarial battle. 

Building trust and rapport with the investor is crucial for a successful deal. Being open about the rationale behind things you push back on can help you avoid acrimonious discussions and focus instead on finding the common ground. Remember, private debt investors have their own limitations and restrictions on how they can price and structure a deal so the sooner you find the common ground, if it is to be found, then the better for everyone. 

Know Your Drop-Dead Points

Before entering negotiations, clearly define your company's non-negotiable terms, also known as "drop-dead points." These are the essential elements that you cannot compromise on, such as valuation, pricing, control rights, or intellectual property protection. It’s best to know these upfront so as you don’t spend weeks and months chasing a deal for it to fall over later due to a non-negotiable. 

In addition, Sign the term sheet only if you are fully committed to executing the investment deal promptly and are prepared to receive the funding. Avoid entering into agreements without a clear plan for implementation.

Test the Covenants

Carefully scrutinize the covenants outlined in the term sheet. These are conditions that the company must adhere to, such as financial reporting requirements or limitations on certain business activities. Try and model them out in excel and, if possible, perform backtesting to ensure the covenants are realistic and achievable. You don’t want to have an angry investor breathing down your neck from day one because a covenant was unrealistically entered into. 

The More Detail, the Smoother the Process

A detailed term sheet serves as a solid foundation for the subsequent negotiation process. The more comprehensive the initial agreement, the fewer surprises and disagreements that arise later. This also has the added benefit of ensuring the use of lawyers down the line is limited when the final agreements are eventually drafted. 

Finally, Calculate the Total Cost of Funding

Don't limit your cost assessment to the stated interest rate. Factor in all associated expenses, such as upfront fees, legal costs, data agent, corporate registration and compliance requirements, and any hedging or transaction fees.

Remember, whilst negotiation is an art and not a science, there are clear processes you should follow when negotiating for business. Approach the process with a clear understanding of your company's needs, a willingness to compromise, and a focus on building long-lasting relationships. 

Finally, by the time a term sheet has landed on your desk, the private debt investor you are working with has already championed your deal within their organization, usually in the form of a screening memo. At this stage, they are as eager as you for the transaction to proceed. 

Want learn more about how Cascade can support your transaction end-to-end? Schedule a demo with our team today.