A 𝐭𝐞𝐫𝐦 𝐬𝐡𝐞𝐞𝐭, also known as a "𝐋𝐞𝐭𝐭𝐞𝐫 𝐨𝐟 𝐈𝐧𝐭𝐞𝐧𝐭", 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 𝐯𝐚𝐥𝐮𝐚𝐭𝐢𝐨𝐧 𝐚𝐧𝐝 𝐞𝐜𝐨𝐧𝐨𝐦𝐢𝐜 𝐝𝐢𝐬𝐭𝐫𝐢𝐛𝐮𝐭𝐢𝐨𝐧 during liquidity events, 𝐜𝐨𝐧𝐭𝐫𝐨𝐥 over decision-making, and 𝐢𝐧𝐯𝐞𝐬𝐭𝐨𝐫 𝐩𝐫𝐨𝐭𝐞𝐜𝐭𝐢𝐨𝐧 terms in line with market standards.
Here are some of the most common and essential terms included in a term sheet:
𝐕𝐚𝐥𝐮𝐚𝐭𝐢𝐨𝐧 𝐨𝐟 𝐭𝐡𝐞 𝐂𝐨𝐦𝐩𝐚𝐧𝐲: This can include pre-money valuation (the company's value before investment) and post-money valuation (value after investment).
𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐀𝐦𝐨𝐮𝐧𝐭: The capital the VC will invest in the startup.
𝐄𝐪𝐮𝐢𝐭𝐲: The percentage of ownership the VC will receive in exchange for their investment.
𝐋𝐢𝐪𝐮𝐢𝐝𝐚𝐭𝐢𝐨𝐧 𝐏𝐫𝐞𝐟𝐞𝐫𝐞𝐧𝐜𝐞: Specifies the payout order in case of a liquidation event, such as the sale of the company.
𝐕𝐨𝐭𝐢𝐧𝐠 𝐑𝐢𝐠𝐡𝐭𝐬: Details the investor's rights to vote on company matters, often proportional to their shareholding.
𝐀𝐧𝐭𝐢-𝐝𝐢𝐥𝐮𝐭𝐢𝐨𝐧 𝐏𝐫𝐨𝐯𝐢𝐬𝐢𝐨𝐧𝐬 : Protects investors from dilution in future financing rounds by adjusting the price at which they initially invested.
𝐕𝐞𝐬𝐭𝐢𝐧𝐠 𝐒𝐜𝐡𝐞𝐝𝐮𝐥𝐞: Conditions under which the founders earn their equity, typically over time.
𝐁𝐨𝐚𝐫𝐝 𝐂𝐨𝐦𝐩𝐨𝐬𝐢𝐭𝐢𝐨𝐧: The makeup of the company's board of directors post-investment.
𝐂𝐨𝐧𝐯𝐞𝐫𝐬𝐢𝐨𝐧 𝐑𝐢𝐠𝐡𝐭𝐬: The right to convert preferred shares into common shares.
𝐃𝐫𝐚𝐠-𝐀𝐥𝐨𝐧𝐠 𝐑𝐢𝐠𝐡𝐭𝐬: Allows majority shareholders to force minority shareholders to join in the sale of a company.
𝐏𝐫𝐞-𝐞𝐦𝐩𝐭𝐢𝐯𝐞 𝐑𝐢𝐠𝐡𝐭𝐬: 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.
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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