The term sheet is eleven pages long and you’ve genuinely engaged with maybe four of them – the ones about your share of profit, your voting rights on major decisions, how big your check needs to be. The other seven are still open in a separate tab. You’re planning to skim them once the numbers you came here for are locked.
The order everyone negotiates in and why it’s backwards
Every JV term sheet gets negotiated in roughly the same order of perceived importance: economics first, control rights second and somewhere in the final stretch – usually when both sides are tired and eager to sign – the governance mechanics. Capital call default provisions. Deadlock resolution. Buy-sell and drag-along terms.
By the time negotiators reach that section, the posture has shifted from “let’s get this right” to “let’s not hold up signing over boilerplate.” Counsel on both sides often has standard language ready to drop in and neither party pushes back, because pushing back on a deadlock clause when the relationship is at its most optimistic feels like planning for a divorce at the wedding.
The problem is that these are not the least important clauses in the document. They are the only clauses that will ever be read carefully again and they will be read carefully by someone under pressure, at the exact moment neither side has the appetite to negotiate them properly.
Why “just read it more carefully” doesn’t fix this
The obvious fix sounds simple: negotiate these clauses with the same rigor as economics. In practice, this is harder than it sounds and not because of laziness.
At signing, neither party knows which side of these clauses they will eventually be on. Nobody knows in advance who will default on a capital call and who will be the non-defaulting partner enforcing the remedy. Nobody knows who will want to exit early and who will want to hold. This uncertainty creates a structural bias toward vague, symmetric-sounding language – clauses that read as fair to both hypothetical positions because neither party is willing to negotiate hard for a position they might never occupy.
That symmetry feels like fairness. It is actually just ambiguity wearing fairness as a disguise. A deadlock clause that says the parties “shall negotiate in good faith to resolve any disagreement” sounds even-handed precisely because it commits neither side to anything specific. The moment an actual deadlock arrives, that clause provides no mechanism at all – just an obligation to keep talking, indefinitely, while the asset sits exposed to whatever the disagreement was about in the first place.
What these clauses are actually for
The reframe that matters here is this: the value of a governance clause is not in whether its terms favor you. It is in whether the clause is specific and executable under pressure, regardless of which side you end up on.
A deadlock clause is not doing its job if it sounds protective but requires a lawsuit to interpret. A capital call default provision is not doing its job if its “remedies available at law” language means the non-defaulting partner’s actual recourse depends on a court’s reading of ambiguous language, months after the capital was needed.
The right question to ask about any governance clause is not “does this favor me?” It is “if this clause were triggered tomorrow, could both sides read it and immediately agree on what happens next, without a lawyer arguing about intent?” A clause that passes that test protects you regardless of which position you occupy when the moment arrives. A clause that fails it protects nobody – it just delays the argument until the argument has real financial consequences attached to it.
What specific, executable actually looks like
Consider the difference in practice. A vague deadlock clause reads something like: “In the event of a disagreement on a Major Decision, the parties shall negotiate in good faith for a reasonable period to resolve the matter.” A specific one names a mediator or mediation process with a defined trigger, a fixed window – say, thirty days – after which an unresolved deadlock converts automatically into a binding buy-sell at a formula price agreed at signing, executed within a defined timeframe. The first clause commits both parties to talking. The second commits both parties to an actual resolution, on a clock, regardless of who wants to keep talking.
The same gap shows up in capital call defaults. “The non-defaulting party may pursue remedies available at law” sounds serious and resolves nothing. A specific version states exactly what happens: the defaulting partner’s ownership interest is diluted by a defined multiple of the shortfall – commonly 150% or more of the unfunded amount – converted to a non-voting class, within a stated number of days of the missed call. Harsh, perhaps. But every party knows exactly what they are agreeing to before it matters, rather than discovering it through negotiation after the fact.
The discomfort of negotiating this level of specificity before the relationship needs it is not a reason to avoid it. It is the exact signal that the clause is doing real work. Clauses that generate no discomfort to negotiate are usually the ones providing no real protection either.
What to do differently
- Insist on a dated, mechanical deadlock resolution clause – mediation with a fixed window converting automatically into a binding buy-sell at a pre-agreed formula – rather than any language built around “good faith negotiation.”
- Specify the exact consequence of a capital call default – the dilution formula, the timeline, whether the remedy is punitive by design – before signing, not after the first missed call forces the question.
- Negotiate buy-sell and drag-along pricing formulas at signing, while neither party knows who will end up buying and who will be selling. Genuine positional uncertainty is what produces the fairest terms; negotiating these clauses after one side already knows its position rarely does.
- Flag every instance of “the parties shall agree” or “using reasonable efforts” in the governance sections and treat each one as an unresolved clause, not a completed one. These phrases are placeholders that feel like governance without functioning as governance.
- Read the governance section before the economics section at least once, and ask directly: would I sign this if I didn’t know which side of each clause I’d end up on? If the answer changes depending on which side you imagine yourself occupying, the clause isn’t finished.
The pushback worth naming
Some will argue that negotiating this level of detail before signing slows the deal and signals distrust at the exact moment both parties are trying to demonstrate good faith. That instinct is understandable, but it has the logic backwards. Negotiating these mechanics while the relationship is at its strongest is the cheapest version of the conversation you will ever have. The alternative – negotiating them for the first time under the pressure of an actual deadlock or default – is not more collegial. It is simply more expensive, for whichever side turns out to have less leverage in the moment it happens.
If your partner defaulted on a capital call next quarter, do you know – not assume, know – what the term sheet says happens next?