Thinking of investing in Spain or buying a Spanish company? Great! There are many reasons to look into investing in a Spanish start-up or business.
Spain is one of Europe’s most advanced markets, with a population of over 47 million and a vibrant tourist industry attracting sightseers from across the world, there are plenty of different kinds of business investment opportunities to suit your preference.
But first, you’ll need to learn a little on term sheets. In this blog post, we will explain what a term sheet is and why you’ll need a term sheet in Spain, to purchase a Spanish business
What is a term sheet and why is it necessary for investments?
If you wish to acquire a legitimate business, you must first draw up a term sheet. This is also true if you wish to purchase a Spanish company. Drafting a term sheet is one of the preliminary documents in Spain required for the sale of a business from one owner to another.
A term sheet legal, but non-binding document outlining the terms of a business agreement. Usually bullet pointed, it establishes the basis for a future binding contract of negotiations between a seller and buyer. However, in itself it is not binding.
Despite the internet and online realm providing a wealth of resources for founders to utilize whilst looking for help with the fundraising process, we find that lots of investors struggle to comprehend certain clauses held within a term sheet. We will explain some of these clauses in more detail below, plus how they relate specifically to Spanish law.
In terms of venture capital investments, a term sheet may be drafted by a start-up in order to attract investors and set out its terms. Investors may then invest in these terms and ideas in return for a percentage of ownership in the company. alternatively, they may wish to negotiate the terms set out in the terms sheet.
Obviously, before investments are made, both parties need to agree to all terms and then move on to the legally binding documents before and financial transactions begin.
When investing in a Spanish startup or business, drafting a term sheet in Spain is one of the best ways to begin. This is because the Spanish based company will be familiar with their own governments’ laws. Any potential investment may seem that extra step too far for the Spanish business if the term sheet is drafted in another country and sent to them in a foreign language.
At Ava Landing, we offer legal advice on investment opportunities for those looking to invest in Spain. Our multilingual team of expert legal professionals have years of experience between them and can begin the process of drafting a simple or comprehensive termsheet in Spain.
What are the main clauses of term sheets?
The content of a term sheet is totally dependent on its buyers or sellers decisions to market. In addition, each term sheet will be different from industry to industry. However, there are some common features of term sheets that you should look out for when investing to make sure you’re covered from a basic standpoint. As previously mentioned, there is a lot of confusion around clauses when initially drawn up.
For example, the founder of a technology company may wish to exit the company three years in the future and withdraw their investment, plus any additional earnings. However, if either the initial investment or agreed percentage of available earnings has not been set out and agreed upon, this will certainly cause friction within the ownership structure.
By spending careful consideration on the terms and clauses included in any agreement, a founder, board of directors, or venture capital firm, can protect themselves financially.
The two main clauses to insert into an initial term sheet agreement would be confidentiality clauses and exclusivity clauses. We will explain them in more detail, below. Although, it is important to note that a break fee is not normally inserted into letters of intent, unless they are linked to any breach of binding obligations. For example, a breach of an exclusivity undertaking would require a break fee insertion.
Here are some features of both confidentiality clauses and exclusivity clauses, plus what they cover in Spanish law.
The Exclusivity Clause in Spain
The exclusivity clause is more commonly applicable to founders or sellers, as it ensures that they will only deal with a specified buyer for a given period or until a deal or purchase is agreed.
It ensures that third parties will not be drafted in for information or financial help whilst negotiations between said buyer and seller are on the table.
Any exclusivity clause in Spain is held up as a binding commitment and, depending on the terms of transaction or investment, can be followed with a penalty clause. Such penalty clause would then indicate the type and level of penalty required if an exclusivity clause were to be broken.
The Confidentiality Clause in Spain
Typically, both parties will expect and want the other party to limit the amount of documentation or public announcements released whilst negotiations are ongoing. A confidentiality clause in Spain will set out these provisions and can also be supplanted by a penalty clause for added assurance.
In Spain, it is common to see both confidentiality and exclusivity terms written as individual agreements. However, it is also common to include both of these as clauses within the initial term sheet. With that said, ensure your term sheet includes both clauses in order to set out your non-binding agreement to the buyer or seller, investor or founder to protect yourself against unwanted friction later on.
How to be prepared in advance of negotiations
Venture capital in Spain is competitive and it helps to arrive willing to negotiate with your buyer or seller. Do your homework on one another and prepare for any trends that have been displayed by either party in the past. This is possibly easier research for a seller to complete, though private equity buyers can look towards industry start-up trends for expected behaviour and financial outcome when considering their option pool.
If this is a first-time investment or first time capital request for either party, serious consideration should be thought out before drawing up any legally binding or nonbinding proposal.
It helps to add that all parties in a merger and acquisition negotiation are under duty to act in good faith. This typically means that reasonable behaviour must be employed during negotiation and any facts, documents, or financial information should be checked and correct to the best of your knowledge.
Any party causing unjustified breach of negotiations or duties would need to compensate for damages caused.
With that said, do not be nervous. There is no need to jump at the first opportunity. If you speak to an investor or founder and do not feel that they are the right people to back your project, learn from your experience and walk away. If in doubt, seek local legal advice if unsure on whether to sell or invest in a business in Spain.
Tips for writing a better term sheet
Term sheets in Spain are generally no more difficult to write than in other countries. There are a variety of standard layouts and examples of term sheets online which are available to download as a template. You can follow these and get an idea of the tone, document length, and terms to consider.
Furthermore, some tips for writing a term sheet in Spain include:
- List the Terms: These can vary greatly, but generally include investors names, their price per share and the nature of their stocks. Plus, pre-investment valuation.
- Summarize the Terms: This details the target company involved in investment and lists any potential investors.
- Explain the Dividends: Specify profit distribution and whether dividends are cumulative or non-cumulative
- Include Liquidation Preference: Included as a worst-case scenario back-up, so that investors can at least receive a portion of their private equity in the event of liquidation.
- Include Voting Agreement and Closing Items: Establishes a voting arrangement, which dictates the weighting of votes, who the voters of major decisions are and when they should be submitted.
- Read, Edit, then Prepare for Signatures: Agree a date of negotiations to be finalized and carefully word any difficult sections. Ensure you are happy with the final terms stated before completing
However, with such a varied number of issues to navigate – especially for first time buyers or sellers – it helps to seek legal advice.
AvaLanding are experienced legal and financial advisors, based in Barcelona, Spain. Our team have worked together on different types of investment opportunities for many years and we take pride in helping those with term sheet difficulties to set out their initial negotiation for future deals.
If you have any questions around investing in Spain, the Spanish startup ecosystem, or wish to make an initial enquiry around term sheet writing: please do not hesitate to contact us for advice