Startup Term Sheet templates

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What is a term sheet?

A term sheet is a non-binding agreement setting forth the basic terms and conditions under which an investment will be made. A term sheet serves as a template to develop more detailed legal documents. Once the parties involved reach an agreement on the details laid out in the term sheet, a binding agreement or contract that conforms to the term sheet details is then drawn up.

A term sheet is drawn up before the rest of the legal financing documents to state the basics terms and conditions of the forthcoming investment to be made. A term sheet is non-binding, and is not a legal promise from the potential investor to invest. It does not guarantee money coming in. It serves more as a template from which more detailed legal documents are developed. Once both investor and founders have reached an agreement on what has been stated in the term sheet, a legally binding contract can be drawn up that conforms to the terms and conditions stated in the term sheet. They usually consist of three parts: funding, corporate governance, and liquidation.

Term Sheet Negotiation

Term sheets are usually centered around 2 things:

  1. Control of the company
  2. What cash is received in the event of an exit

It’s important that as an entrepreneur, you go into a term sheet negotiation as knowledgeable as possible in order to get the best terms possible. Investors are generally going to know their stuff, and will obviously try to come to an agreement that gives them the best possible deal, so you have to know what is going to work best for you too. A lack of knowledge will put you at a real disadvantage, and you are in danger of experiencing information asymmetry.

Key Terms of a Startup Term Sheet Template:

  • Valuation: This is one of the most important terms in a term sheet. This, alongside how much money is being invested, will determine how much of the company the investor will own. (%) This aspect really affects who owns what, and how much money each shareholder will earn when the business is sold.

  • Option Pool: The majority of term sheets will impose the creation of an option pool so that shares can be set aside for hires in the future.

  • Liquidation Preference: This is the name given to downside protection for preferred stock.

  • Participation Rights: These allow preferred stockholders to get dividends before common stockholders.

  • Dividends: These are given as a percentage and are used to give back more return that builds up over time to preferred stockholders.

  • Anti-dilution: This is a feature of preferred stock and basically acts as protection from investors from getting massively diluted in a ‘down round.’

Where can I find Startup Term Sheet Templates?

You can find a number of Startup Term Sheet Templates built by Industry professionals, entrepreneurs, Venture Capital Associations and Investors here on Eloquens below. They are downloadable as PDF or Word Templates and some step by step methodologies to help you better understand a Term Sheet.

For more on Key Terms see:

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