There is a particular point in an investment or acquisition where the commercial negotiation appears to be finished.
The term sheet is signed.
Valuation is agreed.
The broad economics are settled.
Everyone knows the headline deal.
Then the lawyers start drafting the long-form agreements.
Six weeks later, the shareholders’ agreement or sale agreement arrives and something interesting has happened.
The headline figures are still the same.
But the deal is not quite the same deal.
This happens more often than investment teams like to admit.
Deal drift rarely announces itself
The changes are usually technical enough that no single amendment appears dramatic.
A drag-along threshold is softened.
Founder consent rights become slightly broader.
An investor protection acquires additional qualifications.
A liquidation preference is expressed differently.
Reserved matters expand.
Leaver provisions become more founder-friendly.
A warranty is narrowed.
The ability to issue future shares changes.
An exit mechanism becomes harder to exercise.
Look at each point independently and it may appear defensible.
Look at them together and the commercial balance of the transaction may have shifted.
That is the term-sheet gap.
Some of the drift is entirely legitimate
Term sheets are intentionally shorter than final agreements.
They cannot deal with every scenario.
Long-form drafting necessarily requires detail.
Lawyers also identify issues during diligence that were not known when the term sheet was negotiated.
There may be tax implications.
Regulatory issues.
Problems with existing shareholder rights.
Historic commitments that need to be accommodated.
Sometimes the transaction genuinely should change.
The problem is not that the long-form documents contain more detail.
The problem is when material commercial changes happen through drafting without being recognised as commercial changes.
Legal drafting creates negotiation opportunities
Experienced transaction lawyers understand something important:
Where language is open, economics can move.
Consider a drag right.
The term sheet may say that the investor can drag other shareholders on an exit.
The final agreement needs much more detail.
At what ownership threshold?
After what period?
At any valuation?
Can founders object to certain buyers?
Must particular conditions be satisfied?
Each drafting choice affects how useful that right ultimately is.
The same is true of anti-dilution protection, preference rights, founder vesting, board composition, information rights and reserved matters.
The term sheet may contain the commercial principle.
The long-form document determines how effectively that principle operates.
Investment teams need to remain involved after the term sheet
This is where deal processes can become disconnected.
The principal or investment director negotiates the term sheet.
Once it is signed, responsibility moves to lawyers.
The investment team focuses on diligence, financing, IC conditions or another transaction.
Weeks later, the documents are presented for approval.
By then, several rounds of legal negotiation may already have happened.
Reopening a commercial issue close to signing is difficult.
Everyone is under pressure to close.
Transaction costs have accumulated.
Management is fatigued.
Nobody wants to be the person delaying the deal over a clause that now sounds “technical”.
This is exactly why investment teams need visibility into the issues that materially affect the original bargain while drafting is happening.
Not every markup.
Not every definition.
The points where the economics or control position may be moving.
A good deal lawyer should be able to explain the drift
Transaction advice should not require the investment team to read 180 pages of tracked changes to understand what happened.
The useful conversation is much simpler:
“The term sheet gave you X. The current drafting gives you Y. This is why it changed. This is the commercial consequence. This is our recommendation.”
That is legal advice designed for an investment decision.
It allows the team to distinguish between changes that are sensible, changes that are immaterial and changes that need to be pushed back.
Without that translation, investors risk making legal decisions without recognising their commercial consequences.
The risk is particularly acute where founder relationships matter
PE and VC transactions frequently involve an ongoing relationship with founders or management.
That naturally encourages compromise.
The investor wants protection.
The founder wants autonomy.
Both sides need the relationship to work after closing.
The long-form negotiations are where that balance is actually built.
Give management too little freedom and the investor becomes involved in running the business.
Give investors too little protection and they may struggle to intervene when genuine value is at risk.
The goal is not aggressive drafting.
It is drafting that accurately reflects the commercial bargain both sides believe they made.
The closing rush is where leverage changes
One of the most difficult times to fix deal drift is immediately before closing.
There is a psychological shift once a transaction has momentum.
The team has invested time and money.
Approvals may have been obtained.
Announcements may be planned.
Everybody wants to finish.
Points that would have been negotiated firmly four weeks earlier suddenly become:
“Can we live with this?”
Sometimes the answer should be yes.
But that should be a conscious investment decision, not the accidental result of drafting fatigue.
The term sheet should remain the commercial anchor
The term sheet is not the final legal document.
It should, however, remain the reference point for the bargain.
When the final documents differ materially, investment teams should know why.
Good transaction execution is not about preventing the deal from evolving.
It is about making sure it evolves deliberately.
Because the biggest changes in a deal are not always the ones that change the purchase price.
Sometimes the headline economics stay exactly where they were while the rights underneath them quietly move.
And by the time everyone notices, the closing call is already in the diary.
Caveat works with PE and VC investment teams across transactions and ongoing portfolio legal work. If you want legal support that keeps the original commercial deal visible throughout the long-form drafting process – and flags where the economics or control position are starting to move – get in touch.
