A term sheet in the context of a venture capital investment serves as a foundational document outlining critical economic terms governing the relationship between investors and the company. Understanding these economic components is essential for entrepreneurs to navigate investment negotiations and comprehend the implications of these terms on ownership, control, and the future trajectory of the company.
[__________], a Delaware corporation. [Specify the company name, state of incorporation, and the type of entity (C Corp, LLC, etc.)]
Series A Preferred Stock of the Company (“Series A”). [Identify the type of round the investors are participating in and the specific securities being offered (preferred stock, convertible note, SAFE, or common stock).]
$[] million from [________] (“Lead Investor”) and $[] million from other investors. [Clarify the lead investor and the investment amount, along with the available portion of the round for other investors, crucial for dilution calculations.]
Convertible notes and SAFEs convert into "shadow" series of preferred stock (together with the Series A, the “Preferred Stock”). [Explain the conversion mechanism, any preferential terms, and highlight the existence of a Most-Favored Nation clause for investors, impacting dilution.]
$[_] million pre-money valuation, including an available option pool equal to [__]% of the post-Closing fully-diluted capitalization. [Emphasize the significance of pre-money valuation and the size of the option pool, crucial for calculating dilution.]
1x non-participating preference. A sale of all or substantially all of the Company’s assets, or a merger, will be treated as a liquidation. [Highlight the importance of 1x liquidation preference to avoid potential excessive dilution of founder shares in a sale.]
6% noncumulative, payable if and when declared by the Board of Directors. [Note that dividend percentages for private companies are typically discouraged.]
At holder’s option and automatically on IPO or approval of a majority of Preferred Stock (on an as-converted basis). Conversion ratio initially 1-to-1, subject to standard adjustments. [Emphasize the 1-1 conversion from preferred to common stock.]
The Preferred Stock will have standard broad-based weighted average anti-dilution rights, first refusal and co-sale rights over founder stock transfers, registration rights, pro rata rights, and information rights. Company counsel drafts documents. [Point out the significance of these rights in safeguarding the interests of both parties and highlight that legal fees are typically paid by each side separately.]
Founders: [Specify vesting details for founders]. Employees: 4-year monthly vesting with a 1-year cliff. [Outline the existing shares for founders and the vesting schedule for employees, often established in a separate founder agreement.]
For 30 days, the Company will not solicit, encourage or accept any offers for the acquisition of Company capital stock. [Explain the implications and limitations of the “No Shop” clause during investment negotiations.]