Corporate Insight: On top of heads of terms

There are many benefits to agreeing heads of terms with an investor; they help to focus minds, draw out misunderstandings, build confidence and show commitment to the deal.

02 May 2016
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But heads of terms prepared by an investor are normally heavily weighted in their favour at the expense of the founders of the company. In this article, M&A partner Gillian White looks at some of the areas that founders should consider when negotiating.


Considerthe type or class of shares required by your investor. Do they have any special rights attached to them? For example, do they have a preferred right to dividends or capital on a sale? Do they attract a rate of interest? How will these rights impact existing shareholders and could they impact future fundraisings?

Is the investment subject to your company achieving certain milestones? Make sure that the milestones are clear and achievable.


Your investor may want to be satisfied that their investment will qualify for certain tax treatment such as SEIS or EIS. They will also want to know the results of their investigations (financial, legal and commercial) into your company, before they put-up any money.

If more than one investor is coming in at the same time they will want to know the terms on which other investors are investing.

Terms of Investment

Your investor will expect the founders to give warranties about the company and its business, and sign-up to restrictive covenants. Does your investor require the right to appoint a director or a board observer? Investors may also want other controls, such as providing their consent for certain key decisions and having access to information to monitor performance. What restrictions does your investor expect on the issue of new shares in your company? It would not be unusual for all shareholders to have the right to subscribe for new shares (proportionately as to existing holdings) on the same terms as you are offering them in the future. However, does your investor want more stringent controls? Consider carving out the right for the company to issue shares or options (subject to a limit) to employees as incentives.

Your company may need to restrict the ability of shareholders to transfer their shares. Your investor will want to see the founders locked-in but ultimately they will want to realise their investment, so consider the rights around ‘exit’ and who can be required to sell and in what circumstances.


To the extent that you do not already have in place a confidentiality agreement or NDA, make sure that the term sheet includes confidentiality obligations.


Your investor may want to be given some time to complete due diligence and negotiate the investment and may therefore want a period of exclusivity. Think carefully before you agree – what happens if your negotiations with the investor fall through? Is the timing of the investment critical to your business plan?

Fees and Expenses

Finally, it is worth noting that an investor may expect your company to cover certain costs in connection with their investment including legal costs and other due diligence costs. If you concede, look to agree a cap with your investor.



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