The past several posts have detailed the main points of a venture debt term sheet. I hope you have found them helpful.
A term sheet outlines the basic business terms of a deal. I think of a term sheet as a more detailed version of how you would describe a deal to a colleague in a hallway conversation.
Once those are agreed to the lender’s legal counsel will draft the full set of legal documents. In this case drafting means putting the term sheet business points into the lender’s standard legal documents (at least this is how we do it at CLP). The legal documents are quite a bit more detailed than a term sheet.
Negotiating the full set of legal documents can go quickly or slowly. Quickly will cost less. Here are a couple of ideas that can help you efficiently negotiate the documents:
Ask your counsel how often they have negotiated loan agreements.
At CLP we use a specialist debt lawyer for our loan agreement and specialist equity lawyer for the warrant. We do this because each knows their area best and the cost will be lower.
Companies should do the same. If your counsel is not familiar with loan documents you won’t get a worse deal from the lender. But you will take longer to get to the same deal and spend more.
When you get the first draft of the documents discuss and mark them up. Then call the lender and have a lender/company discussion of the business points without lawyers on the call.
Go back to the term sheet and clarify anything that may not have translated into the legal documents. Agree on the business terms and let the lawyers work on the legal terms.
If you (or the lender) lets legal counsel negotiate business terms you will pay more and may not get the result either party wants.
Some companies like to cap the venture lender’s legal fees which is a sensible request since the company pays for both sets of lawyers. Lenders don’t generally like this idea. My view is that if our counsel has worked with the company’s counsel on a loan in the past - and they were reasonable – that we would cap our legal fees. I would want the company to cap its side as well, even though they pay for it. Both parties should be on an even playing field with respect to costs.
If our counsel is unfamiliar with the company’s lawyers we can get a quote and ask for a regular tracking of costs to discuss with the company. This way we can keep on top of the costs. And the regular tracking reminds everyone that we are keeping an eye on the tab.