Essential Term Sheet Terms for Founders

Updated
January 30, 2024

A ๐ญ๐ž๐ซ๐ฆ ๐ฌ๐ก๐ž๐ž๐ญ, also known as a "๐‹๐ž๐ญ๐ญ๐ž๐ซ ๐จ๐Ÿ ๐ˆ๐ง๐ญ๐ž๐ง๐ญ", is a non-binding agreement between an investor and a startup outlining the fundamental conditions for a proposed investment.Inherent to this document is the understanding that more complex, detailed documents will eventually be developed and signed down the road.

The term sheet typically includes terms related to the ๐ฏ๐š๐ฅ๐ฎ๐š๐ญ๐ข๐จ๐ง ๐š๐ง๐ ๐ž๐œ๐จ๐ง๐จ๐ฆ๐ข๐œ ๐๐ข๐ฌ๐ญ๐ซ๐ข๐›๐ฎ๐ญ๐ข๐จ๐ง during liquidity events, ๐œ๐จ๐ง๐ญ๐ซ๐จ๐ฅ over decision-making, and ๐ข๐ง๐ฏ๐ž๐ฌ๐ญ๐จ๐ซ ๐ฉ๐ซ๐จ๐ญ๐ž๐œ๐ญ๐ข๐จ๐ง terms in line with market standards.

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Here are some of the most common and essential terms included in a term sheet:

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๐•๐š๐ฅ๐ฎ๐š๐ญ๐ข๐จ๐ง ๐จ๐Ÿ ๐ญ๐ก๐ž ๐‚๐จ๐ฆ๐ฉ๐š๐ง๐ฒ: This can include pre-money valuation (the company's value before investment) and post-money valuation (value after investment).

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๐ˆ๐ง๐ฏ๐ž๐ฌ๐ญ๐ฆ๐ž๐ง๐ญ ๐€๐ฆ๐จ๐ฎ๐ง๐ญ: The capital the VC will invest in the startup.

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๐„๐ช๐ฎ๐ข๐ญ๐ฒ: The percentage of ownership the VC will receive in exchange for their investment.

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๐‹๐ข๐ช๐ฎ๐ข๐๐š๐ญ๐ข๐จ๐ง ๐๐ซ๐ž๐Ÿ๐ž๐ซ๐ž๐ง๐œ๐ž: Specifies the payout order in case of a liquidation event, such as the sale of the company.

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๐•๐จ๐ญ๐ข๐ง๐  ๐‘๐ข๐ ๐ก๐ญ๐ฌ: Details the investor's rights to vote on company matters, often proportional to their shareholding.

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๐€๐ง๐ญ๐ข-๐๐ข๐ฅ๐ฎ๐ญ๐ข๐จ๐ง ๐๐ซ๐จ๐ฏ๐ข๐ฌ๐ข๐จ๐ง๐ฌ : Protects investors from dilution in future financing rounds by adjusting the price at which they initially invested.

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๐•๐ž๐ฌ๐ญ๐ข๐ง๐  ๐’๐œ๐ก๐ž๐๐ฎ๐ฅ๐ž: Conditions under which the founders earn their equity, typically over time.

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๐๐จ๐š๐ซ๐ ๐‚๐จ๐ฆ๐ฉ๐จ๐ฌ๐ข๐ญ๐ข๐จ๐ง: The makeup of the company's board of directors post-investment.

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๐‚๐จ๐ง๐ฏ๐ž๐ซ๐ฌ๐ข๐จ๐ง ๐‘๐ข๐ ๐ก๐ญ๐ฌ: The right to convert preferred shares into common shares.

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๐ƒ๐ซ๐š๐ -๐€๐ฅ๐จ๐ง๐  ๐‘๐ข๐ ๐ก๐ญ๐ฌ: Allows majority shareholders to force minority shareholders to join in the sale of a company.

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๐๐ซ๐ž-๐ž๐ฆ๐ฉ๐ญ๐ข๐ฏ๐ž ๐‘๐ข๐ ๐ก๐ญ๐ฌ: Gives existing investors the right to participate in future funding rounds to maintain their percentage of ownership.Understanding these terms is crucial for founders to negotiate effectively and secure terms that are favorable for their startup's future while ensuring investors' fair returns.

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Understanding these terms is crucial for founders to negotiate effectively and secure terms that are favorable for their startup's future while ensuring investors' fair returns.

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