Term Sheet Terms

A term sheet is a document provided by an investor that contains their proposed terms to a funding. It is these terms that are the basis of negotiation, and that are eventually memorialized in the final closing papers. They are important. They represent the key economic and control rights of the parties involved for everything concerning standard economic distributions to later funding rounds, and they will also govern in the case of most disputes that may arise. 


Editor's Picks

Term Sheet Terms

Brad Feld

Even though a term sheet might be four to eight pages long and the definitive documents might be 100 pages or more, other than economics, there are really only three things a VC needs in a deal: 1. Pro-rata rights. When things are going well (up) a VC wants the ability to continue to invest money to maintain their ownership. 2. Liquidation preference. When things don’t go well (down), a VC wants to get their money out first. 3. Board seat. In reality it mainly gives one the ability to know what’s actually going on, to the extent that anyone knows what’s actually going on in a fast moving startup.

 

Fred Wilson 

Investors like to require that an unissued option pool is in the pre-money valuation calculation when they put money into early stage companies. This post is about how to size the option pool. Many investors just want the number to be as big as possible. They'll put 15% into the term sheet and then let the entrepreneur negotiate them down from there and maybe if you are lucky you'll get them to 10%. But there is no logic in that kind of negotiation. It is just a price negotiation disguised as something else. It is bullshit. And I see investors engage in that kind of practice all the time. It annoys me.

 

Mark Suster 

I’m putting millions of dollars in your company.  My thesis is YOU.   I need some protection that you’re not fully or mostly vested where you could simply walk away with a large stake in the company, screwing not just me but the entire employee base of the company.  I’m not Sequoia.  I’m not looking to bring in a new team to replace you.  If you leave my thesis is largely out the door.

 

Chris Dixon

In venture capital, tranching refers to investments where portions of the money are released over time when certain pre-negotiated milestones are hit.  Usually it will all be part of one Series of investment, so a company might raise, say, $5M in the Series A but actually only receive, say, half up front and half when they’ve hit certain milestones.  Sometimes something similar to tranching is simulated, for example when a VC makes a seed investment and pre-negotiates the Series A valuation, along with milestones necessary to trigger it.

 

Chris Dixon

The most important term in a startup term sheet that no one seems to think carefully about isfounder vesting. There are two key points about vesting: 1) All startup employees – including founders! – should vest over 4 years from their start date (with a one year “cliff”). 2) Founders should always have acceleration on change of control!