Consequences with investors if company doesn't meet agreed milestones

I have a few questions about promised milestones to investors.

Is it common to include very specific milestones in the term sheet?
What are the consequences if you fail to meet them? Losing Board seats?

Thanks

Investors Terms And Conditions Term Sheet

asked Oct 19 '12 at 05:02

Wewill See
53 points

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This question is probably too generic - the answers wildly vary by industry, type of investor, etc... Can you be more specific (ie, which round of investment, what type of investor, etc...)? – Blueberryfields 11 years ago
Yes, you are right. It was quite generic...editing now... – Wewill See 11 years ago
The example I refer to is the case of an early stage startup bootstrapped to date. The company gets 1M of investment from VCs and sets 5M profit in year 3 as milestone. My question relates to the consequences of not meeting that milestone but still being profitable and growing. Thanks – Wewill See 11 years ago
Take a look at this: http://www.brightjourney.com/q/losing-controlling-interest-company-bad As a suggestion, if you're asked for milestones, don't frame them in terms of results (ie. revenue, number of customers...) but instead, frame them in terms of actions (ie. we'll implement this by this date, we'll release that on that date...). – Frenchie 11 years ago
Thanks for your answer frenchie. Are milestones commonly asked? – Wewill See 11 years ago
Yes, I think it's a sign that you're managing your company and that you know, or at least have some idea of what needs to be done to grow your business. – Frenchie 11 years ago
If the milestones are in the term sheets, then the term sheets should specify the "consequences" – Tim J 11 years ago

2 Answers

I have never seen term sheets which contain specific milestones like this, but if they did, they would have to also specify the specific consequences of failing to meet them.

A term sheet is just an abbreviated version of what will become a contract, intended to help both sides negotiate the terms of a complicated contract in a concise and simplified form. It would be nonsensical for a contract to specify a milestone without stating what the consequences are of failing to meet it.

answered Feb 16 '13 at 12:24

Joel Spolsky
13,482 points

In Brazil, where I live, we have never been asked for detailed milestones. When negotiating we had to have a 5-year plan with revenue and profit projections and a high-level product roadmap.

answered Oct 19 '12 at 08:47

Alexandre R. L. E Marcondes
131 points

Thanks Alexandre. So, your revenue projections were part Of the business plan to help convincing investors of your business. However your deal didn't have any milestones with clawbacks or provisions. Is that correct? Cheers – Wewill See 11 years ago
Yes, you got it right. We had an expected return rate and a deadline for the investor to selling his part (getting out of the partnership) and realizing his investment. Of course he pushes for milestones on the product/service, in order to reach the values he is expecting, but it is not on a contract. – Alexandre R. L. E Marcondes 11 years ago
Thanks Alexandre. So, as far as I can derive from the comments and answers, it really depends. Sometimes, milestones are not included in the deal terms (like in Alexandre case), other times there are milestones framed in terms of actions (as explained by frenchie) , and other times there will be milestones framed as results that will specify the consequences (as mentioned by TimJ) – Wewill See 11 years ago