What do I need to know about Term Sheets?

Take-aways from a talk in the Trust Center on 8/9/16

Term sheets

• Contains many things that are there just for legacy reasons (boiler plate = something that you can say that was there for legacy reasons)
• You only really need to focus on the economic and the control sections.
• Term definitions – see slides: common stock, preferred stock, pre and post money
• Negotiating term sheets
  • Valuation negotiation don’t obsess only over this and remember that other terms might have really high monetary implications so give them enough attention
  • Option pool - this is not split between you and the investor (comes out ONLY from the founders side and the founder gets diluted)
    • Typical A round: 15-20% (varies based on your hiring plan and future needs)
    • Make certain the option pool is a good fit for your company’s size/ stage. It’s a necessity so don’t cheap out.
  • Vesting
    • Usually 3-4 Y term
    • Cliff: if you leave any time before the cliff you get nothing.
    • Upfront vesting – critical for founder.
      • Hard to get credit for part time/ student but for time you did full time you should get some credit.
    • Important to have this even for founders so everyone is invested long term.
    • Acceleration – if you’ve had an exit you will get additional credit to incentivize you to stay post acquisition.
  • BOD
    • VCs will want to be on your BOD. They will usually be hands off from operations if it’s all going well and be more engaged in strategic decisions.
    • Thin: Do you want to be king or rich? Will impact your decisions.
    • Independent BOD members - Don’t give this decision to your VCs. You want to be a part of the selection so there isn’t a bias in decision making later on
  • Other terms
    • Anti-dilution, veto control, preferred stocks perks… (see slides)

For more information, see "Is there a book that teaches you how to raise money?"