will have certain issues which dictate whether or not they will be willing to proceed with the deal, and the termsheet gives both parties the ability to raise their ‘deal breaker’ issues at an early stage. In theory agreement on these points should be easier at an earlier stage in the process but, if no compromise can be reached, both parties can at least cut their losses before they have invested significant time, management attention or money into the deal.
100,000 Feet Ltd.
When the directors of 100,000 Feet Ltd. went out to raise funding, they quickly established a good rapport with the principals from a particular venture capital house.
The VC
was a good fit for the business, having made a number of investments in a similar sector. They understood 100,000 Feet’s technology and the two teams got along well. After the initial meeting, it was clear to all concerned that there was a deal to be done. The headline terms of the deal were agreed over dinner the following week, and a termsheet was signed by both sides soon afterwards.
The VC duly dispatched its lawyers and specialists to perform diligence on 100,000 Feet’s books and records, and with management spending significant time and advisers fees arranging those records, answering questions and moving the transaction along. Everything was progressing smoothly until the VC’s lawyers delivered a first draft of the investment agreement. The
terms,, while not in themselves particularly harsh, were just not acceptable. A series of meetings ensued but although there was still goodwill on both sides, the parties could not come to agreement and the deal fell through.
While the momentum created by the initial meeting between 100,000 Feet and the VC had been helpful in moving towards a deal, it had also pushed the directors through termsheet stage too quickly.
give the termsheet proper consideration, management had not identified and dealt with their dealbreaker issues at the appropriate time. Whether or not the issues could have been resolved with the VC at termsheet stage is open to question, but having the deal broken at that stage would have allowed 100,000 Feet to go back to other interested investors while they were still warm – and with their reserves of time, effort and cash still intact.
WormsEye Ltd.
The management of WormsEye Ltd. identified a partner for a potential joint venture which, if completed, would be the transaction that would define their business. WormsEye’s management was conscious of the need to get the deal terms correct – they had a limited number of possible JV partners. Sensibly, their dealbreakers were all covered in early discussions with their JV partner and the draft termsheet that Wormseye then received from their partner accurately reflected the agreed positions on the dealbreakers.
By failing to
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