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• A term sheet is the basis of a legal agreement
between an investor(s) and a company,
outlining the terms and conditions of an
investment into the target company.
Term Sheets – an Introduction
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• Hope for the best but plan for the worst
• Protect downside risk while maximizing upside
potential
• Forms the basis of a legal document
• Aligns interests of founders with interests of
investors
• Establishes corporate governance
Goals
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Critical Items
• What do you want the deal to look like?
• Type of security to be issued
• Valuation and amount to be invested
• Voting and information rights
• Board establishment and representation
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Types of Investment
• Equity
– Common
– Preferred
• Debt
– Straight
– Convertible
• Angel investments capture upside reward,
therefore Equity or Convert Debt are
instruments used
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Seed Preferred Structure
• Allows upside value capture
• Introduces set of rights available only to
investors
– Anti dilution
– Investor board seats
– Information rights
– Redemption rights
– Rights related to future investment rounds
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Aligning Interests between
Investors and Founders
• Identify key value drivers in the investment
– Product launch
– IP strategy
– Strategic partnerships
– Sales targets
• Focus on two or three key metrics
• Upon value creation event, management can claw
back a portion of equity if they have demonstrated
superior execution
– Warrant structure
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Corporate Governance
• Goal is to achieve a balanced board from the
start
• 5 person board minimum – 3 person boards do
not work
• Expandable easily to 7
– Current CEO
– Founder representative
– 2 Investor representatives
– Independent
