A term sheet is a non-binding document outlining proposed terms for investment. Founders should be cautious as a signed term sheet is a promise,.
A term sheet is a non-binding document outlining proposed terms for investment. Founders should be cautious as a signed term sheet is a promise, not a commitment, and investors are not obligated to follow through.
Hi, everyone. This is Alejandro Cremades, and today we’re going to be talking about what is a term sheet? Essentially, if you’re fundraising, and if you’ve gotten to that point where a venture capital firm or any other investor is excited about making an equity investment in your business – that is, essentially, giving you money and receiving a piece of the pie – getting equity ownership in your business before you even pursue to get the offering documents, which are those binding agreements that are outlining everything; you’re going to be presented with a term sheet. So, with that being said, let’s get into it. What is a term sheet? A term sheet is a nonbinding document. It is a one or two-page document that outlines. It’s just a promise. It’s a promise that outlines what will be those proposed terms that are going to come afterward in a potential set of offering documents. The thing
about term sheets is that they’re not binding, meaning that even if you sign the term sheet with the investor, it doesn’t mean anything. They are not responsible for financing the investment after that. I have seen the mistake that many founders make in which they receive a term sheet; they get excited; they start hiring like crazy, and then, eventually, that investor doesn’t follow through, and then they’re stuck holding the bag. So, be very careful and just really know that ultimately a term sheet is only a promise. It’s not a commitment. Do not try to increase the spend or anything like that until the money is in the bank. Some of the common things that you’re going to find on the term sheet are going to be: • Who is issuing the note or stock? • The type of collateral being offered • The valuation • The amount being offered • The shares and the price • What happens on liquidation or
IPO? • The voting rights • The board seats • The conversion options • The anti-dilution provisions • The investor rights to information • The founder’s obligation • Who will pay for legal expenses? • Nondisclosure requirements • Rights to future investments • Signatures Obviously, out of all of these different terms, the most important ones are essentially the valuation that you’re putting on the business and the type of shares that you’re giving, whether they’ve common or they have some type of preference. And then, of course, the board seats that you’re giving away because with the board seats, you are giving out control of your business. You’re giving out the possibility for other people to have a say in the matter and to have a contribution when it comes to being at a strategy level on the board of your business. Typically, it depends, from financing cycle to financing cycle. At a
seed-stage level, you’re looking at giving away one board seat. On a Series A, you’re giving away maybe two to three board seats, and so forth all the way up to Series B, where you go all the way up to perhaps nine seats on the board. The next steps after you receive the term sheet is, you really want to push the investor to give you the offering documents. You want to agree on the term sheet. Then after the term sheet is received and is signed between both parties, there’s going to be that due diligence process where the investor is going to take a look at some of the claims that you have been making to make sure that everything is confirmed and that you haven’t lied about anything or that anything was not taken out of context. Then after the due diligence is approved and passed, then you go to signing the offering documents, and then the money is wired into your bank account. With that
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