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Term Sheet

Definition

A term sheet is basically a letter of intent that spells out how much an investor is willing to give and under what conditions.  It is typically the starting point for serious negotiations between the investor and entrepreneur. According to Kauffman Foundation “The Term Sheet is the roadmap to definitive agreements that will control the investment between an entrepreneur’s company and a venture capitalist. Though this initial document is intended to express basic understanding of the key points of a deal, many terms are negotiable even after the Term Sheet is signed.”

Provisions

A term sheet may be one or two pages, or it might be a lengthy document.  These are the provisions that can be covered covered in a Term Sheet:

  • Fees
  • Standstill or No-Shop
  • Confidentiality
  • Closing
  • Capitalization
  • Dividends
  • Liquidation Preference
  • Conversion/Automatic Conversion
  • Anti-Dilution Provisions
  • Voting Rights and Protective Provisions
  • Redemption
  • Registration Rights
  • Right of First Refusal/Co-Sale
  • Vesting of Founders’ Shares
  • Pay-to-Play Provisions
  • Board of Directors

These are explained in the Kauffman FastTrac Tech article on FastTrac Term Sheets . The FastTrac Tech course curriculum suggests that these are topics that the entrepreneur should pay particular attention to:

  • Pre-money Valuation
  • Liquidation
  • Option pool
  • Milestone or tranched closings
  • Price protection
  • Board composition
  • Founder vesting

Click here to download a Valuation Worksheet For more insight on Valuation and Term-Sheets read  A Philosophy of Valuation and Term-Sheets, an article by Tim Keane, Director, Golden Angels Investors

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