Did you know angel investors and venture capital firms invest in only a fraction of the companies whose pitches and presentations come their way? If your company is one of the fortunate few to make it to the front of the pack and an investor is interested, you’ll want to be prepared with a term sheet.
A term sheet sets out the terms of a potential investment, outlining the rights and responsibilities of each party. Though the document lays the groundwork for an investment, it is no guarantee that an investor will commit the money. Term sheets will vary depending on the deal; however, they typically contain terms related to the offering itself such as price, closing, amount to be raised, liquidation preference, protective provisions and other corporate governance including voting rights or anti-dilution provisions and other matters related to information rights, board matters or additional agreements to be signed.
The key is to provide enough level of detail in order for the term sheet to act as a roadmap for those drafting the formal agreements while simultaneously enabling investors to find the terms of the deal without having to read through lengthy documents. It is also easier for both parties to negotiate the terms of the deal and air out any issues early on before spending the time and expense of getting the formal documents drafted.
Term sheets can potentially set a precedent for later rounds of funding, so it will be important to be fully understand how certain terms may impact you in order to make the best decisions for your company.
Melody Ashby is a Senior Attorney at Meyer Law, one of the fastest growing law firms in the United States. Melody helps companies with corporate and securities matters, trademarks, contracts, employment matters and capital raises. Melody is a mentor at tech incubators and accelerators across the United States. Learn more about Meyer Law here on our website + follow us on Instagram @loveyourlawyer
