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?"

 

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