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What is Termsheet

Depending on what stage your startup is in like seed, growth, scale stage etc… you will be looking for specific funds (seed/Angel/venture capital/IPO etc) and pitching your ideas to the investors to get the funding in return of partnership or equity in your startup. And if  the investors likes your idea then they will like to have an agreement with you, which will denote on what terms and condition will the partnership between you and them will be worked out. The term sheet, denotes an intention of a venture capital firm to invest in any given startup,

Termsheet Definition

termsheet contractTerm sheet is a summary of terms used to enter a deal between an investor and a company. It implies the conditions of a business transaction, as proposed by a party. It may be either binding or non-binding.

Term sheet is a document meant to record two or more parties’ intentions to enter into a future agreement based on specified terms. It’s a bullet-point document outlining the material terms and conditions of a business agreement. After a term sheet has been “executed”, it guides legal counsel in the preparation of a proposed “final agreement”. Once the parties involved reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is then drawn up legally.

Key things discussed in Termsheet

  • Amount raised
  • Price per share
  • Pre-money valuation
  • Liquidation preference
  • Voting rights
  • Anti-dilution provisions
  • Registration rights

Startupfreak has developed a simple tool to calculate the founders share when exit happens, check it out.

In general, there are only two things that venture funds really care about when doing investments: economics and control. The term “economics” refers to the end of the day return the investor will get and the terms that have direct impact on such return. The term “control” refers to mechanisms which allow the investors to either affirmatively exercise control over the business or allow the investor to veto certain decisions the company can make. If you are negotiating a deal and an investor is digging his or her feet in on a provision that doesn’t affect the economics or control, they are probably blowing smoke, rather than elucidating substance[source]

 

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