Offer Letters - Entrepreneurs watch out for traps when in funding discussions

Frequently, when an investor agrees to provide funding, it will set out its basic terms in an offer letter. It will normally expect the management team which it is proposing to back to countersign this offer letter. Offer letters do, however, contain a number of traps for the unwary, including the following:

• An offer letter will inevitably be "subject to contract" which means that it does not legally bind the investors to provide funding. For example, they may well want to do further "due diligence" ie a more detailed investigation into the company's business and affairs (this should obviously be less onerous in a start-up situation).
• The offer letter will set out the main terms of the proposed investment. Although usually not legally binding, it will be very hard for the management team to improve on those terms once the offer letter is signed.
• Investors often require a period of exclusivity to be set out in the offer letter (on a legally binding basis). This means that the management team will have to agree not to speak to any other possible funders or provide any information on the investment opportunity for the length of the exclusivity period. Whilst this is often in principle acceptable, the precise wording of the obligations should be carefully considered with professional advisers.
• Beware particularly of any provision whereby the management may have to pick up costs and expenses incurred by the investors if the transaction, for various reasons, does not proceed. Such costs and expenses could be substantial.

Another key issue at the outset of discussions with proposed funders is obviously confidentiality. A further update on this will follow shortly.

If you have any questions or would like further information please contact corporate partner, David Day at [email protected] or by telephone on 0207 367 2948.