How the wrong clause in your term sheet can affect your business

We all know fundraising is quite complicated right now. It’s not the real crisis the press will have you believe, but it’s slow and arduous, even more so.

Now something nobody tells you: not every investor has your best interest at heart, and we should be talking about that.

I know it well, as I suffered it myself. As a CEO, I lost everything once. Millions of euros raised, a team who had invested their lives, years of hard money, everything: lost. My time, energy (possibly my marriage) and hard work included. Wiped out.

The culprit? A seemingly innocuous clause in our term sheet: Minority Veto Rights.

As it sounds, it allows minority shareholders/investors exceptional rights, bypassing the standard Shareholders Agreement. It allowed a rogue investor to block further, much-needed funding. He also locked two buyers from acquiring the business (which would have made everybody very happy, including the said investor) and, worse, allowed them to reset the company’s valuation to zero (also named a cramdown), which led us to lose the entire founder team, staff and the other investors their lives work.

Unfortunately, that’s not uncommon. It’s so easy to fall into a trap without knowing it, and a recent CEO who joined our Fundraising Bootcamp shared a story remarkably similar to mine. We even have a module named “nasty term sheet tricks” which discloses those tricks that will 100% kill you, and how to negotiate them out.

Many CEOs are first-time founders with zero or little fundraising experience, while investors do deals day in and day out. Fundraising is challenging at the best of times – add to that the number of unscrupulous and fake investors out there, and you could be in for nasty surprises. There’s so much that can go wrong before it goes right.

I urge you to find your gang of experienced founders, mentors, lawyers and investors to help you navigate the process before you even consider signing anything – or you can join ours.

Francois Mazoudier
helping tech founders reach their (usually mad) dreams with the Fundraising Bootcamp (check it out).

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