At some point in your startup career you're going to have to build or review a term sheet (the "terms" of the agreement between you and investors). Whether its between you and your parents or between you and a VC firm, you want to understand how they're structured and how to protect yourself.
Whether you're looking to raise money now or down the road, this is an invaluable resource to understanding the dynamics, terms, and options you have as an entrepreneur to structure agreements. This certainly won't replace having a great lawyer, but at least you'll know what you're talking about and can work towards the most fair terms.
And Damion has seen (and signed) a lot of term sheets. He specializes in early-stage startup finance negotiations, corporate structure, mergers and acquisition, and intellectual property transactions.
This guide outlines what typical term sheet look like, how to understand and frame financial terms, how to leverage corporate structure for control, clarifying options and vesting information, and more.
If you're looking for cash, this is the right place to start.
I Got A Term Sheet, Now What?
- Sit Down And Read It.
- Get A Lawyer.
- Where Do I Sign?
The Financial Terms
- Valuation And Price: How Much Do I Get?
- Liquidation Preferences: How To Avoid Getting Hosed
- Dividends: Avoiding The Pitfalls.
- Conversion: How Investors Make Their Money.
- Anti-Dilution: How Investors Deal With The Downside.
- Warrants: "We're Not Sure How Much We Like You Yet."
The Control Terms
- Board Of Directors: Avoid Losing Control For As Long As You Can.
- Protective Provisions And Investor Director Approval: More Protection For Investors.
- Management And Information Rights: The Investors Are Watching.
Founders And Company Structure
- Vesting: Did You Really Think You Owned The Company?
- Option Pool: Your Employees Want Equity Too.
- Non-Competition And Best Efforts: You Actually Have To Keep Working.
- Confidential Information And Invention Assignment: All Your Ideas Belong To Us.
The Other Stuff
- Drag Along: Sell When We Say So.
- Pay To Play: Once You're In, You're In.
- Right To Participation In Future Raises (Pro Rata): When We're In, We're In.
- Right Of First Refusal / Co-Sale Rights: If You're Selling, We're Buying.
- Registration Rights; High-Class Problems.
- Redemption Rights: Letting Your Investors Jump Ship.
- Reps, Warranties And Closing Conditions: Sign, Then Wait.
- No-Shop Provisions: You're Stuck With Us.