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I have a few questions about promised milestones to investors.

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

Thanks

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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 Oct 18 '12 at 19:55
Yes, you are right. It was quite generic...editing now... – WewillSee Oct 18 '12 at 20:07
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 – WewillSee Oct 18 '12 at 20:18
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Take a look at this: answers.onstartups.com/questions/40321/… 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 Oct 18 '12 at 20:39
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If the milestones are in the term sheets, then the term sheets should specify the "consequences" – TimJ♦ Oct 19 '12 at 0:57
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2 Answers

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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.

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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.

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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 – WewillSee Oct 19 '12 at 7:13
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 Oct 19 '12 at 13:25
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) – WewillSee Oct 23 '12 at 13:31

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