Miscellaneous Terms: The Fine Print That Bites

The “Miscellaneous” section of a term sheet typically bundles various standard legal provisions that, while not directly related to the core economic terms of the investment, are critical for the enforceability, interpretation, and successful execution of the overall agreement. Key elements often found here include:

  • Governing Law and Jurisdiction: This clause specifies which jurisdiction’s laws will govern the interpretation and enforcement of the term sheet and subsequent definitive agreements. It also dictates where any disputes will be resolved.
  • Closing Conditions: These are the prerequisites that must be satisfied by both the company and the investor before the investment can be finalized and funds are disbursed.
  • Severability: Ensures that if one part of the term sheet is deemed unenforceable, the rest of the agreement remains valid.
  • Entire Agreement: States that the written term sheet constitutes the complete understanding between the parties, superseding any prior discussions or communications.
  • Confidentiality and Non-Disclosure: Often binding even in an otherwise non-binding term sheet, this provision obligates parties to keep sensitive information exchanged during negotiations confidential.
  • Costs and Expenses: Specifies how legal and other transaction-related fees will be handled.

Why it Matters?

These “miscellaneous” clauses are far from trivial; they lay the groundwork for how your company operates legally and how any disagreements will be handled.

  • For Governing Law: Choosing the right jurisdiction impacts dispute resolution, enforcement, and costs. It determines the legal framework under which the agreement is interpreted and enforced. For instance, different states or countries have varying corporate laws and legal precedents that could favour one party over another in a dispute.
  • For Closing Conditions: These ensure that both parties have completed necessary due diligence and legal formalities before the investment is finalized. They protect the investor by guaranteeing certain conditions are met, and for founders, they clarify what needs to be delivered for the deal to close. Delays in satisfying these conditions can significantly postpone or even jeopardize funding.
  • For other miscellaneous clauses: Clauses like Severability and Entire Agreement prevent unintended consequences and provide legal certainty, while Confidentiality protects sensitive company information.

Common Variations

Governing Law and Jurisdiction:

  • Founder’s Preference: Founders often prefer a governing law that aligns with their company’s principal place of business, especially if it’s a jurisdiction known for more founder-friendly corporate laws (e.g., California in the US). They might argue for a familiar legal system that is easier to navigate.
  • Investor’s Preference: Investors frequently push for a jurisdiction with a robust and well-established body of corporate law and a history of fair rulings in commercial disputes. Delaware in the US is a popular choice for investors due to its sophisticated corporate legal framework and specialized Chancery Court. In India, while term sheets are generally non-binding, certain clauses, including governing law, are often binding and Indian courts are increasingly becoming stricter about contractual intent.

Closing Conditions:

  • Due Diligence: Investors will conduct legal, financial, and technical investigations of your company. The closing is often conditioned on the “satisfactory completion” of this due diligence, giving investors an out if they find significant discrepancies or red flags.
  • Blue Sky Laws: These are state-level securities regulations in the US designed to protect investors. Your attorneys will determine applicable laws and exemptions, as certain filings might be required even for exempt offerings.
  • Amended Certificate of Incorporation: Often required to authorize new classes of stock or additional shares, this legal document must be filed in your company’s jurisdiction of incorporation.
  • Legal Opinion: Some investors may require a formal letter from the company’s counsel providing conclusions on legal matters, such as the company’s valid incorporation and stock issuance.
  • Board Composition and Approvals: The term sheet might stipulate changes to the board of directors’ composition or require specific approvals from existing shareholders or the board for the transaction.
  • Key Employee Retention: Investors might require certain key founders or employees to sign new employment agreements or continue their roles for a specified period.

Other Miscellaneous Clauses:

  • Exclusivity/No-Shop: This binding clause prohibits the founder from soliciting other investors for a specific period while the current investor conducts due diligence. The duration of this period can vary (e.g., 30-45 days is typical).
  • Costs and Expenses: Some term sheets might include a clause requiring the company (and thus indirectly the founders) to cover a portion of the investor’s transaction fees, which can be significant.

Examples

  • Governing Law: A tech startup in Bangalore might initially prefer Indian law, but a US-based investor might insist on Delaware law for consistency with their other investments and familiarity with its corporate statutes.
  • Closing Conditions: An investor might make the funding conditional on the completion of a thorough legal audit of the company’s intellectual property, or on the founder vesting schedule being updated.
  • Confidentiality: During negotiations, the investor signs an NDA (often part of the term sheet or a separate binding agreement) agreeing not to share the startup’s proprietary technology details with competitors.

Evolv’s Recommendations:

  • Governing Law:
    • Negotiate Strategically: While investors often prefer Delaware, founders should consider if their local jurisdiction’s laws offer specific advantages or are simply more practical for their operations. Understand the implications of each jurisdiction on shareholder rights, dispute resolution, and regulatory compliance.
    • Dispute Resolution: Pay close attention to any clauses specifying arbitration over litigation, or vice versa, and the location of such proceedings.
  • Closing Conditions:
    • Due Diligence Preparedness: Have an organized data room ready with all relevant legal, financial, and operational documents. Delays in providing documentation can significantly slow down the closing process.
    • Clarity on Conditions: Ensure all closing conditions are clearly defined and achievable. Ambiguous conditions can lead to disputes or delays. If a condition seems overly burdensome or subjective (“satisfactory completion” of due diligence), discuss its scope and specific requirements.
    • Legal Review: Always have a qualified startup lawyer review these conditions to ensure they are standard and fair, and to identify any potential pitfalls that could derail the closing.
  • General Miscellaneous Clauses:
    • Binding vs. Non-Binding: Understand which specific clauses are binding (e.g., confidentiality, exclusivity, governing law, costs) even if the overall term sheet is non-binding. These have immediate legal consequences.
    • Exclusivity Period: Be mindful of the duration of the “no-shop” or exclusivity clause. While standard, an excessively long period can limit your ability to negotiate with other potential investors if the current deal stalls.
    • Costs and Expenses: Clarify who bears the legal and other transaction costs. It’s common for both parties to cover their own fees, but some investors might try to pass on their expenses to the company.
    • “Plain English” Review: Ensure that all “finance words” or legal jargon are explained clearly by your legal counsel. If you don’t understand a term, ask for clarification.
    • Long-Term Impact: Every clause, no matter how small, sets a precedent for future funding rounds and company operations. Consider the long-term implications of each provision on your control, future fundraising ability, and potential exit.

Understanding and carefully negotiating the miscellaneous clauses in your VC term sheet is crucial for securing a fair and sustainable investment that aligns with your company’s long-term vision.