Dutch VC Term Sheets: Binding Terms, Exclusivity and Deal Documentation
Category: InsightsThe term sheet should separate the deal from the process
A VC term sheet should record the economics and governance package clearly enough for the parties to know what they are negotiating, without accidentally turning every commercial point into an immediately enforceable obligation to complete the financing.
For a Dutch BV, that distinction deserves particular attention. Valuation, investment amount, share class, liquidation preference, option-pool treatment and investor rights are usually intended to become binding through the definitive financing documentation. Exclusivity, confidentiality, costs and certain process arrangements often need to take effect as soon as the term sheet is signed.
The heading “non-binding term sheet” is not enough by itself. The drafting should identify which provisions bind immediately and which remain subject to definitive documentation.
This article is part of Venture Capital Insights on Dutch BV financing and investor rights.
Commercial terms usually remain subject to definitive documentation
Valuation, investment amount and the resulting ownership percentages should be sufficiently clear to allow the round to be modelled. The same applies to the proposed share class, liquidation preference, anti-dilution, pro rata rights, board rights and reserved matters.
That does not mean those provisions should already constitute the final investment agreement.
I prefer a term sheet to settle the commercial choices and leave the detailed legal implementation to the definitive documents. If a 1x non-participating liquidation preference has been agreed, for example, the term sheet should say so. The investment agreement, shareholders’ agreement and articles can then address the detailed mechanics.
The same applies to the cap table. It should show the agreed financing economics, including convertibles, warrants and the option pool on the relevant fully diluted basis. For option-pool mechanics, see Option pools in Dutch startup financings.
For the wider Dutch financing structure, see Raising Venture Capital in a Dutch BV.
Some provisions need to bind from signing
Exclusivity is the clearest example. An investor conducting due diligence and spending money on documentation will often want the company to stop soliciting competing financing proposals for an agreed period.
If exclusivity is meant to be binding, the term sheet should specify its duration, scope and any permitted exceptions. A vague statement that the investor expects exclusivity is not a good substitute for a clear no-shop provision.
Confidentiality should also be addressed expressly, although an existing NDA may already regulate this. The two documents should not create inconsistent confidentiality regimes.
Costs deserve similar precision. If the company is expected to reimburse the investor’s legal, tax or due-diligence expenses, the term sheet should state whether reimbursement is capped and whether it applies only at closing or also if the transaction does not complete.
Due-diligence access can also be binding. In that case, the obligation should be workable for the company and subject to appropriate restrictions around privileged, personal or commercially sensitive information.
Be careful with conduct restrictions before closing
Investors sometimes want the company to agree that it will operate in the ordinary course or obtain consent before taking certain actions between term sheet and closing.
That can make sense where signing and closing are expected to take time. It also means that an investor who has not yet funded the company may already influence operational decisions.
I would keep pre-closing restrictions focused on matters that could materially change the investment case: issuing new securities, taking on significant debt, making unusual distributions, selling material assets or entering into major transactions outside the ordinary course.
The term sheet should also state when those restrictions end if the financing does not proceed.
Broader governance rights belong in the definitive financing package. US-style VC terms in Dutch BV documentation explains how investor protections are divided between the investment agreement, shareholders’ agreement, articles and Dutch corporate approvals.
Walking away before definitive documents are signed
International investors sometimes assume that a non-binding term sheet means either side can walk away at any time without further consequences.
Dutch law requires a more careful analysis. Parties generally remain free to discontinue negotiations, but the contractual wording, the stage of the process, conduct during negotiations and expectations created between the parties can become relevant.
For that reason, the term sheet should make the intended position explicit. If neither party is obliged to complete the financing until the definitive documents have been agreed and signed, say so. Also specify which provisions survive termination of the process, such as confidentiality, exclusivity for its agreed period, costs and governing law.
The same issue arises more broadly in Dutch transaction negotiations; see Pre-contractual liability in Dutch transactions.
From term sheet to Dutch BV documentation
Once the commercial deal is agreed, the term sheet needs to be translated into the Dutch financing documents.
For a typical equity round that means an investment agreement dealing with subscription, funding, warranties, conditions and closing; a shareholders’ agreement for ongoing founder-investor relations; and articles of association supporting the relevant share classes, voting and economic rights.
Shareholder and board resolutions may also be needed. If new Dutch BV shares are issued, the round will normally require notarial implementation.
This is where an apparently clear international term sheet can still create drafting issues. ‘Preferred shares’, ‘protective provisions’ or ‘board rights’ need to be allocated to the correct Dutch documents rather than copied mechanically from a US or UK form.
Practical conclusion
A good VC term sheet should be commercially specific and legally selective.
Settle valuation, investment amount, cap table and the principal investor rights. State clearly that those terms remain subject to definitive documentation if that is the parties’ intention. Separately identify the provisions that must operate immediately, particularly exclusivity, confidentiality, costs and process obligations.
For a Dutch BV, I would also check before signing the term sheet that the proposed share rights and governance package can actually be implemented through the shareholders’ agreement, articles, corporate approvals and notarial closing mechanics.
FAQ
Is a Dutch VC term sheet legally binding?
It can be partly binding. The document should specify which provisions are intended to bind immediately and which commercial terms remain subject to definitive financing documentation.
Should valuation and investment amount be binding?
Usually they form the agreed commercial basis for drafting without themselves creating an unconditional obligation to complete. The wording should reflect the parties’ actual intention.
Is exclusivity normally binding?
If an investor is being given a genuine no-shop period, it should be drafted as a binding obligation with a clear duration and scope.
Can an investor walk away after signing a non-binding term sheet?
Often yes, particularly where the term sheet expressly reserves completion until definitive documents are signed. Dutch pre-contractual principles and the parties’ conduct can still be relevant, so the intended walk-away position should be documented clearly.
Dutch counsel at term-sheet stage
For an international investor or lead counsel, the useful time to involve Dutch counsel is before the term sheet hardens into definitive drafting. Dutch input at that stage can identify whether the proposed share rights, governance package, option-pool treatment and closing structure can be implemented efficiently in a Dutch BV.
Dirk de Waard advises investors, founders and international counsel on Dutch VC financings and is partner at Venture Lawyers in Amsterdam. He can review or negotiate the Dutch aspects of the term sheet and subsequently take responsibility for the Dutch investment agreement, shareholders’ agreement, corporate approvals and notarial workstream. Contact dirk.dewaard@viottalaw.com.
