By Palak Devpura
The term sheet arrives. The valuation looks good. The founders celebrate. Someone posts a quiet “big things coming” update on LinkedIn.
And then the real work begins.
A term sheet is not the same thing as money in the bank. It is usually the commercial blueprint for the transaction: valuation, investment amount, security type, board rights, liquidation preference, founder obligations, exclusivity, information rights and exit provisions. Some provisions may be binding, commonly confidentiality, exclusivity, governing law or costs, depending on drafting, while the investment itself usually remains subject to diligence and definitive agreements.
The first big stage after the term sheet is due diligence. Investors and their advisers begin testing whether the company they heard about in the pitch room is the same company that exists on paper.
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They look at incorporation records, the cap table, previous issuances, founder ownership, material contracts, intellectual property, employment documentation, taxes, litigation, licences, data practices and regulatory compliance. The purpose is not simply to find something wrong. It is to understand the risk profile of the company.
Next comes documentation. Depending on the transaction, this may include a share subscription agreement, shareholders agreement and amendments to the company’s constitutional documents. The broad promises of the term sheet now become detailed rights and obligations. This is where a seemingly harmless phrase such as customary investor rights can become several pages of consent matters, transfer restrictions, warranties, indemnities and exit mechanics.
Then come the conditions precedent. Perhaps an old shareholder filing needs to be corrected. Maybe an IP assignment from a founder is missing. A key employment agreement may need to be signed. The company might need board and shareholder approvals, valuation documentation or regulatory filings. Until agreed conditions are satisfied or waived, closing can remain pending.
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Only after the closing mechanics are completed does the investment move into allotment and post closing compliance. Shares or securities are issued, registers and cap tables are updated, and the required corporate and foreign investment filings, where applicable, need to follow.
The founder lesson is simple. Treat the term sheet as the beginning of execution, not the finish line. A startup that maintains clean records, signed IP ownership, accurate cap tables and organised contracts moves through this stage very differently from one that begins housekeeping only after the investor asks.
Funding rounds rarely fail because founders do not know how to celebrate a term sheet. They become difficult because the company was not transaction ready before it arrived.
(Palak Devpura is co-founder of Spinach Laws, a startup-focused legal services firm advising founders on incorporation, brand protection and cross-border transactions. This column is part of the ongoing Spinach Laws × The American Bazaar series on law for founders.)