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Term Sheet Basics
Term Sheet Basics
Term Sheet Basics
Term Sheet Basics
Term Sheet Basics
Term Sheet Basics
Term Sheet Basics
Term Sheet Basics
Term Sheet Basics
Term Sheet Basics
Term Sheet Basics
Term Sheet Basics
Term Sheet Basics
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Term Sheet Basics


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Presentation on term sheets given to the MIT VC Competition (

Presentation on term sheets given to the MIT VC Competition (

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  • 1. Term sheet basics Mark Watkins, Twitter: @viking2917 “ If I have seen further it is by standing on the shoulders of giants”* *(i.e., most of this content came from somebody else…references at the end)
  • 2. some preliminaries
    • what kind of investors?
      • friends and family, corporate entities, Angels, VCs
    • how many investors?
      • usually, the earlier the company, the fewer investors there are
      • I’m going to assume 1, but there are often more
    • how do you pick your investors?
      • that topic is too big for today 8) – but as/more important than the terms themselves
    • how do you convince them to invest?
      • that topic is also too big for today 8)
    • for the rest of the deck, I’m assuming VCs / Angels
      • your mileage may vary
  • 3. a quick example
    • Let’s say you want to raise $1M
    • Let’s say the investor wants to own about 25% of the resulting company
    • Therefore the value of the company before the investment has to be $3M
      • ($1M is 25% of $4M)
      • After the investment the company is worth the $1M + whatever assets the company has
    • Ownership % determined by # of shares issued
      • # of shares somewhat arbitrary at this point
      • usually two classes of shares, Preferred (investors) and Common (founders)
      • share price = $4M / # of shares
      • For our example, let’s assume 2M shares issued, so share price is $2
  • 4. A twist
    • Classic VC is $ for equity (shares)
    • Newer trend is “convertible debt”
      • instead of shares, debt holders get right to convert to equity in a later financing
      • usually at a discount
      • debt can be simpler. Legal docs much less complicated
      • defers price discussion
      • at the seed stage, you can retain more control (e.g. board seats, voting rights)
    • sometimes called a “bridge” or “bridge loan”, especially for later rounds
  • 5. VC lingo
    • A “round” is a financing event
      • identified by letter progression mostly (Seed, A, B, C, etc)
    • “ Pre-money” valuation – the company’s worth before the investment round
      • “ pre” for short
    • “ Post-money” valuation – what the company is worth after the round
      • e.g. post-money = Pre-money plus invested capital.
      • “ post” for short
    • In our previous example:
      • $3M pre
      • $4M post
      • $2 per share
      • “ In my first round, I took 1 on 3”
  • 6. the basics – what’s a term sheet?
    • a preliminary agreement between an investor(s) and a company
      • will be followed by a much longer set of legal documents
    • basic variables
      • valuation (“pre”)
      • amount raised
      • option pool / option program details (e.g. vesting)
        • what shares are available for future employees?
      • price per share (this is derived, not a variable)
      • dilution – how much do you own before and after the financing?
        • not really a variable – it’s derived from the other variables.
      • term sheet will have a pile of other details…..
  • 7. advanced topics
    • founder vesting
      • is there any? (best practice is “yes”)
      • founder options vs. shares
      • accelerated vesting on change of control – single trigger, double trigger
    • board composition - how many members? who’s on it?
    • liquidation preferences & other preferences
    • anti-dilution – protects existing investors in a “down” round
    • pro rata – right to invest on a % basis in future funding rounds
    • protective provisions
      • protects investors against negative economics – e.g. change of bylaws, issuing preferred securities, paying dividends, taking on debt, board composition changes, etc.
    • future financing / acquisition scenarios
      • drag along: requires some shareholders to assent to sale if majority wants to
      • pay to play: you get converted to common stock if you don’t do your pro-rata
  • 8. a bunch of other stuff
    • closing dates, share price, pre/post
    • founders & investors
    • voting rights
    • cap table (including option pool)
    • matters requiring board approval (e.g. corporate loans/debts, permitted investments)
    • may require non-compete / nondisclosure agreements
    • shop / no shop
      • can the company talk with other investors after term sheet signed?
  • 9. the process
    • ideally you have more than one term sheet coming
      • gives you negotiating leverage, options
      • you want to keep them moving at more or less the same rate
    • Is the term sheet real?
      • high quality firms don’t issue term sheets if they don’t intend to fund
      • some firms issue term sheets before the real decision is made
      • as an entrepreneur, it’s important to know the difference
      • ? how often do your term sheets get turned into deals
      • ? what was the last term sheet that didn’t go to deal, and why?
    • an investment will come along with a “due diligence” process
      • you want as much of this as possible done ahead of the term sheet
    • shop / noshop can impact this
  • 10. warning signs & things to keep in mind
    • participating preferred
      • investors more than get their money back before founders/common holders get money
    • crazy protective provisions
    • shop/noshop should be mutual, ideally
    • when was the last time you signed a term sheet that didn’t close?
    • you get a term sheet too early
      • no references, no partner agreement/meeting, no business diligence is complete)
    • term sheet that requires “approval of investors partnerships”
      • your champion may not actually have the approval to do a deal.
    • objectionable employment agreement or other employment terms
    • some things are going to get renegotiated anyway.
      • e.g. accelerated vesting, registration rights, etc
  • 11. even more advanced topics
    • later rounds (B, C, D, E, F, Mezzanine, etc etc) will be more complicated
    • more than one investor will be more complicated
    • not going to go into that today
  • 12. Legal Stuff
    • use a law firm that does startup stuff
      • e.g. Gunderson Dettmer in Boston
      • your costs will be lower and you’ll get a better outcome
      • they typically have templates that VCs have seen/liked
    • template documents are available from a number of sources
      • National Venture Capital Association
      • Y Combinator
      • TheFunded Founder Institute
        • FFI - Plain Preferred Term Sheet
  • 13. resources & reading
    • National Venture Capital Association & NCVA Model Legal Documents
    • Venture Hacks: Term Sheet Hacks: Get a Great Deal - Venture Hacks
    • Brad Feld’s Term sheet series: Term Sheet Series Wrap Up
    • – chris dixon’s blog / Ideal first round funding terms
    • Jeff Bussgang: Seeing Both Sides: In VC deals, Price Doesn’t Matter - But The "Promote" Does
    • Mark Suster’s answer to What are examples of good startup term sheets? - Quora
    • Want to Know How VC’s Calculate Valuation Differently from Founders? | Both Sides of the Table
    • Mark Suster’s Cap Table Template: Venture Capital Valuation Spreadsheet
    • Standard Start Welcome – New York-based organization for template legal docs for startups