Meaning
A contractual event or condition specified in an investment proposal that automatically activates a specific clause or moves the transaction to the next phase of execution. Within startup financing, a term sheet trigger might mandate the release of a second tranche of capital or the conversion of outstanding notes once a specific milestone is achieved. This mechanism creates a predictable path for both founders and investors by linking funding to performance.
It reduces ambiguity during the fundraising process.
Funding Milestone
Securing capital in stages helps mitigate risk for the investing entity. A term sheet trigger often depends on the company achieving a specific revenue target or launching a product by a set date. When these conditions are met, the next stage of funding is released without requiring a new round of negotiations.
This structure keeps the business focused on near-term delivery.
Legal Obligation
While the term sheet itself is mostly non-binding, the specific triggers for exclusivity or confidentiality become active immediately upon signing. Once a term sheet trigger of this type occurs, the company is legally barred from negotiating with other potential investors for a set period. This restriction allows the lead investor to conduct due diligence without fear of being outbid.
It ensures both parties proceed in good faith.
Operational Consequence
Failing to meet these conditions can lead to a sudden loss of momentum. If a term sheet trigger is missed, the startup may face a funding shortfall or have to accept less favorable terms. This risk requires founders to plan their cash runway carefully.
