Venture Capital Term Sheets – What to know

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Venture Capital Term Sheets – What to know


Term sheets are an integral element of fundraising from investors and Venture Capital funds. After your investment pitch builds investor interest and develops into negotiation a term sheet becomes the basis on which an initial agreement on deal terms is signed. The parties can then go into detailed due diligence to hammer out all the specific and close on the actual investment knowing that there is intention round the table to complete the process.

Entrepreneurs must be proficient and knowledgeable when it comes to term sheets – you can rely on legal counsel and your CFO for a lot of backup and expertise but this doesn’t preclude the need for the entrepreneur to understand the details in a term sheet.

Examples of concepts central to term sheets are below – make sure you are comfortable with these at least before entering term sheet negotiations:

  • Pre- vs post-money valuation – know which is which and how they differ. Understand what “fully diluted” means and how option pools play a part
  • Preferred stock – VC funds almost exclusively employ preferred stock in making venture investments. Preferential rights include liquidation preferences, anti-dilution, tag-along, drag-along and a host more.
  • Convertible instruments – a large proportion of seed and early stage investments are made using convertible notes instead of preferred stock. Make sure you understand how conversion happens and when and the typical terms attached to the notes.
  • Typical term sheet boilerplate – exclusivity, or the lack thereof, timing, legal conditions, governance, warranties, etc.

Every entrepreneur that is thinking of raising capital needs to get to grips with term sheets. It is always advisable for entrepreneurs to seek input from legal counsel and their CFO to help ensure the investment process goes smoothly and favorably.

tempCFO recently hosted an educational webinar with panelists from WilmerHale on the topic of term sheets and covering various aspects and tips on dealing with the negotiation process. Watch the recording here and gain the insight you need into Venture Capital Term Sheets.

For any further queries or inquiries, get in touch.

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