MGLS INSIGHTS

In PART 1 of this mini-series, we went over what we mean when we talk about non-legally binding term sheets, letters of intent, and memoranda of understanding (let’s just call them all “Term Sheets”), when a business should consider using, and why they can be so potentially useful in working out big and/or complicated deals. In this PART 2, we will talk about what items you should consider including in a Term Sheet, what can be left out, and what role your lawyer in the Term Sheet process given that these are not supposed to be legally binding documents for the most part.

In MGLS’ experience, Term Sheets can be used for a lot more than only investment and acquisition deals. In fact, Term Sheets can be an incredibly useful tool for any business working on any unusual and significant agreement or arrangement with one or more third parties. In this PART 1 on this topic, we discuss what is usually meant when someone talks about a non-binding Term Sheet, when a business might consider using Term Sheets, and why they can be so useful in working out big and/or complicated deals.

Before you and your best friends start a company together, it is wise to spend some time discussing certain key items that will govern business matters between you and to then put you’ve agreed on in a legally enforceable agreement -- what we would call a “Founders Agreement.” By working out these important points in advance, you and your teammates can bring clarity and shared vision to your new enterprise and avoid disputes and potential lawsuits down the road.

Given the various complicated issues with stock options (and we’ve only scratched the surface here), why don’t companies just give actual shares that are subject to some sort of vesting schedule instead of stock options?

Giving early-stage hires equity compensation is often the best solution for new businesses that are low on cash, compared to established businesses, and want to incentivize key team members.

And for these early-stage team members, equity compensation is often the holy grail. Over the decades, tech giant equity compensation has created thousands of millionaires. Let’s take a closer look at stock options.

Dilution is a very, very common process with startups; since startups usually do one financing round after another, an early shareholder may end up getting diluted multiple times.