A term sheet is a written document that the parties exchange and lists the important terms of the deal.Before actually executing the legal agreements and beginning the time-consuming due diligence, the document summarizes the main points of the deal agreements and clarifies any differences.
Even though it would be ideal to have a simple investment process, you might encounter an investor who tries to include terms in the term sheet that don’t help you as the founder of the company.Be on the lookout for the following signs on the term sheet format:
Unfair financing
If a portion of your investor’s money is going to be used as a loan for your company’s expenses, make sure the terms of the note aren’t so harsh that your business could go bankrupt trying to pay it back.
Huge controlling stake
Financial backers need to have some stake in the organization, yet a few financial backers might request a huge stake that would give them the greatest offer and, hence, the controlling part of your organization.
Limiting conditions
An investor might ask you to do some things, but they might also want to limit the amount of future fundraising you can do.Before signing the terms sheet, consider whether this is advantageous to your company.
Common Terms
on a Term Sheet When you’re just starting out as a business owner, you might not be familiar with a lot of the jargon on a term sheet.Some common terms and their definitions are as follows:
Valuation
You probably already know what your company’s value is, especially if you need investors right now. You might also see the terms “pre-money valuation” and “post-money valuation” mentioned.The value of the company prior to receiving the new investment is referred to as the pre-money valuation, whereas the value of the company after receiving the new investment is referred to as the post-money valuation.
Include clause
A major shareholder can use this clause to force a minority shareholder to follow their lead in business decisions, especially when selling a company.
Dividends
Based on the company’s profits, dividends are paid to shareholders on a regular basis, typically quarterly.
Supportive of rata privileges
An investor receives these rights so that they can participate in subsequent funding rounds.There may even be pay-to-play clauses that force investors to participate in subsequent investment rounds or face penalties if they do not.
Agreement on no-shop
After you sign the term sheet, your relationship with other investors is limited by this agreement.It’s normal to have to wait a certain amount of time after signing the term sheet before starting a new round of fundraising, but the term sheet should say when it’s okay to look for more investments.
