The Impact Term Sheet at NYU School of Law

A member of the legal team at FinDev Canada – Canada’s development finance institution – Jaime works in debt and equity investments in the private sector of emerging markets.

We met Jaime in New York at the Grunin Center Annual Conference on Legal Issues in Social Entrepreneurship and Impact Investing – in the U.S. and Beyond. 

And we’re thrilled that he recently used the Impact Term Sheet as part of a clinic at NYU School of Law, simulating an equity investment in a social enterprise by an impact investor. He shared some of his experiences in a guest blog post covering how the clinic works, how the ITS was used, and why he feels it’s such an important tool within the legal investment space.

We want to thank Jaime for his enthusiasm and contribution to expanding cross-continent collaboration and learning in the impact investment and for being an ambassador of the Impact Term Sheet. 

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Read on about Jaime's experience with The Impact Term Sheet!

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During my LL.M. at NYU School of Law, I explored development finance, impact investing and social enterprise law.  At NYU, I took a seminar on Financing Development and a class on the Law & Business of Social Enterprise, which allowed me to learn about the drafting and negotiation of impact investing legal documentation.  

In particular, I participated in a simulation of an equity investment in a social enterprise by an impact investor with students from the law school and from the NYU Wagner School of Public Service. And I crafted a business and legal plan for an equity investment in a social enterprise.  These two exercises required the drafting of respective term sheets for the simulated equity impact investments, and we had been instructed to make sure that the documents reflected the dual expectations of impact and financial return.  

As soon as I found out about the Impact Term Sheet (“ITS”), I realized how useful it is to draft and negotiate a transaction with an impact lens.  Some of the ITS impact terms that I reviewed while drafting and negotiating the term sheets for the simulation exercises were the following:

• Social mission and mission alignment: laying out in the cover page of the term sheet the company’s purpose and mission, as a key consideration impacting the governance structure of the company and the rights and duties of the multiple parties and stakeholders involved in the investment and the company’s operation more broadly, as well as including in the term sheet an express reference to the mission alignment of the company and the investors (which ties into other impact provisions in the term sheet).
• Impact reporting: presenting in the term sheet a summary of the principles for impact reporting, as well as including an annex laying out visually the relevant impact reporting obligations.
• Stakeholder governance: including in the term sheet a section dealing with tools for stakeholder engagement and stakeholder grievance mechanisms.
• Share transfer restrictions to lock-in mission: including in the term sheet mechanisms to prevent mission drift resulting from acquisitions or investor exits.

Additionally, the guidance notes to the ITS helped me understand the meaning and legal consequences of the relevant impact terms, which was useful in the simulated negotiations.  

To sum up, the ITS taught me how to contract around impact provisions and how to negotiate those provisions with the ultimate goal of structuring viable impact-oriented transactions.  

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Why the ITS is an important tool in the legal impact investment space 

The ITS lays out the multiple legal instruments that can be used to incorporate sophisticated impact considerations in an equity investment in plain language, making the ITS accessible and useful to the many different members of the impact investment community, from law or business school students who are taking their first steps in this area, to seasoned transactional attorneys, investment officers or investee company representatives.  

The standardization in impact terms provided by the ITS translates into greater certainty in the drafting and negotiation exercises during the structuring of direct equity impact investments, which leads to increased trust in the impact investing space.  Further, the ITS guidance notes and the ITS user guide provide greater insight on the relevant impact provisions, and they allow for necessary flexibility when navigate through this nascent field. They achieve this by explaining the rationale behind the relevant impact terms, including examples and market practices, and by referring to additional materials that can be used in conjunction with the ITS.

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How organizations like LISI can contribute to the development of the impact investment field

I believe that for impact investing to grow as a way of channeling funds to solve the world’s most pressing challenges, all while delivering financial returns to investors, the legal community (including transactional attorneys) must join business minds in their efforts to further develop the field.  

Organizations like LISI and the Global Alliance of Impact Lawyers (GAIL) are the perfect space for members of the legal community to get together and exchange ideas on how to increase legal certainty in the field and how to best work alongside non-lawyer participants to create innovative solutions for inclusive and sustainable development.