The Plain Preferred Term Sheet
Originally published: 16/11/2017 14:44
Publication number: ELQ-14406-1
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The Plain Preferred Term Sheet

Simplified term sheet leaving out terms adding to complexity whilst aligning the incentives of founders and investors.

This term sheet has been simplified dramatically and some big changes have been made that challenge the status quo. These include:

-'Participation' has been eliminated. This means that investors can no longer get both their equity allocation and their liquidation preference.

-A liquidation preference of 1x. With no participation, this signifies that investors can choose from the options of getting their money back or converting to equity, receiving only the value of the equity itself- a downside protection term.

-Single trigger vesting: this permits investors to earn money in the case of an exit by vesting all of their equity. A lot of investors need 'double trigger vesting,' meaning that the business will need to sell, and the founder will have to be terminated for their shares to be vested.

-Recent and complicated terms like 'super pro rata' investment rights have not been included in this template, as they make things a lot more complicated whilst only adding minor value to investors. Venture returns seem to be getting smaller whilst legal fees keep going up. To close a Series A investment will cost $50,000 worth of legal fees. Incentives are not being aligned due because founders are being hit with more and more terms that are locking up exit value.

-With this term sheet, founder and investor incentives are aligned. In this term sheet, generated returns of an exit closely correlate to the percentage ownership of those participating.

*Originally shared on the Founder Institute website*

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