A ๐ญ๐๐ซ๐ฆ ๐ฌ๐ก๐๐๐ญ, also known as a "๐๐๐ญ๐ญ๐๐ซ ๐จ๐ ๐๐ง๐ญ๐๐ง๐ญ", 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 ๐ฏ๐๐ฅ๐ฎ๐๐ญ๐ข๐จ๐ง ๐๐ง๐ ๐๐๐จ๐ง๐จ๐ฆ๐ข๐ ๐๐ข๐ฌ๐ญ๐ซ๐ข๐๐ฎ๐ญ๐ข๐จ๐ง during liquidity events, ๐๐จ๐ง๐ญ๐ซ๐จ๐ฅ over decision-making, and ๐ข๐ง๐ฏ๐๐ฌ๐ญ๐จ๐ซ ๐ฉ๐ซ๐จ๐ญ๐๐๐ญ๐ข๐จ๐ง 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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๐๐๐ฅ๐ฎ๐๐ญ๐ข๐จ๐ง ๐จ๐ ๐ญ๐ก๐ ๐๐จ๐ฆ๐ฉ๐๐ง๐ฒ: This can include pre-money valuation (the company's value before investment) and post-money valuation (value after investment).
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๐๐ง๐ฏ๐๐ฌ๐ญ๐ฆ๐๐ง๐ญ ๐๐ฆ๐จ๐ฎ๐ง๐ญ: The capital the VC will invest in the startup.
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๐๐ช๐ฎ๐ข๐ญ๐ฒ: The percentage of ownership the VC will receive in exchange for their investment.
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๐๐ข๐ช๐ฎ๐ข๐๐๐ญ๐ข๐จ๐ง ๐๐ซ๐๐๐๐ซ๐๐ง๐๐: Specifies the payout order in case of a liquidation event, such as the sale of the company.
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๐๐จ๐ญ๐ข๐ง๐ ๐๐ข๐ ๐ก๐ญ๐ฌ: Details the investor's rights to vote on company matters, often proportional to their shareholding.
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๐๐ง๐ญ๐ข-๐๐ข๐ฅ๐ฎ๐ญ๐ข๐จ๐ง ๐๐ซ๐จ๐ฏ๐ข๐ฌ๐ข๐จ๐ง๐ฌ : Protects investors from dilution in future financing rounds by adjusting the price at which they initially invested.
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๐๐๐ฌ๐ญ๐ข๐ง๐ ๐๐๐ก๐๐๐ฎ๐ฅ๐: Conditions under which the founders earn their equity, typically over time.
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๐๐จ๐๐ซ๐ ๐๐จ๐ฆ๐ฉ๐จ๐ฌ๐ข๐ญ๐ข๐จ๐ง: The makeup of the company's board of directors post-investment.
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๐๐จ๐ง๐ฏ๐๐ซ๐ฌ๐ข๐จ๐ง ๐๐ข๐ ๐ก๐ญ๐ฌ: The right to convert preferred shares into common shares.
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๐๐ซ๐๐ -๐๐ฅ๐จ๐ง๐ ๐๐ข๐ ๐ก๐ญ๐ฌ: Allows majority shareholders to force minority shareholders to join in the sale of a company.
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๐๐ซ๐-๐๐ฆ๐ฉ๐ญ๐ข๐ฏ๐ ๐๐ข๐ ๐ก๐ญ๐ฌ: 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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