Terms sheets are very complicated legal documents and it is mostly used in equity rounds… In this blog post, I want to explain the nature of the Term Sheet and the most important points to you…

Let’s create a case to understand it better. Imagine a startup raising funds through a VC company for the first time and skipping the early-stage investment…

What to negotiate first before signing a term sheet contract?

In order to sign agreements, our founders and investors have to negotiate some terms. The first important key term is the pre-money valuation…

It is used to calculate the percentage of ownership in the company. How much do they own for the money they put in versus how much do you own related to the pre-money valuation…

That will be the most important topic between founders and VC investors when they are negotiating…

What are the other important topics to consider when negotiating on a term sheet?

The second one is the size of the option pool… Which you should remember what option pool is used for from our previous lessons…

Basically, it is used to hire talented people for the startup… and without them, you don’t have a company. So how big is that pool affects the ability of the startup to hire new talents. But the bigger pool means also reducing your ownership in the company.

Another topic that is very important to beware of in the Term Sheet is governance-related issues…

This means who has what rights on what decisions… Who can block certain things…

Simply there are a couple of things that really matter… One is hiring or firing key teammates… Another is the spending limit for the managers… And the capital increase of the company end of the fiscal year…

You have to debate with your investor about board structure and voting rights before you sign the Term Sheet…

The most common case about the board structure you can see in the market is there are even numbers of representatives both founders and investors and one independent person who is a neutral third party, jointly chosen by investors and founders together…

Other than these terms, all clauses are legal jargon which is necessary to put in the Term Sheet…

Disclaimer!

If you are raising funds with a VC, I strongly recommend you consult a lawyer who has previous experience on Term Sheets…

And as a founder, you have to read and understand all the clauses in the term sheet… This is very very important… You can not be lazy even if you are working with the best lawyer in the world…

If you have any questions regarding the term sheet and its clauses please feel free to contact me or drop a comment below…