How to Structure a Fundable Term Sheet

A term sheet is a document written early on between the entrepreneur and funding source such as venture capital firm or angel investor.

The term sheet is much like a letter of intent, in that it is pre-cursor to due diligence but with more detailed information about terms of financing and rights and privileges.

Term sheets are non-binding except for confidentiality and exclusivity in negotiation. Nevertheless, the term sheet is complex and should be negotiated vigorously before signing as it is difficult to materially change during the construction and negotiation of the final agreement.

The structure of capital transactions such as those that involve venture or angel capital are less dependent on boiler plate stipulations and more reflective of the needs and preferences of the parties involved.

Many legal and financial vehicles can be employed to balance the needs of both parties’ individual and mutual concerns.

You should consult your attorney to get guidance on which suits you best. However, we can offer some food for thought when considering a term sheet.

Your personal needs:

  • Capital
  • Maintain Control of Company
  • Dilution of personal stock
  • Stock repurchases in the event of retirement or termination as manager
  • Operational support and guidance that investor can offer

Investor needs:

  • Return on Investment
  • Risk
  • Liquidity
  • Your company’s valuation at exit
  • Rights in the event of an IPO
  • Level of participation in management of company
  • Rights in future rounds of financing
  • Opportunity to provide future rounds of financing

Mutual Needs:

  • Retention of key management
  • Forum for conflict resolution among investors
  • Health of post investment company
  • Tax consequences of investment
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