Now that we know the definition of a term sheet from my previous article, we can focus on the structure and some of the terms that are essential to include in a term sheet.
What is in a Term Sheet?
Every term sheet is different, which is why there are several variables that should be taken into account when creating one, such as the type of funding round, how much is at stake, and who is involved.
In general, term sheets for seed-stage rounds tend to follow a certain structure and are much simpler. The reason behind this is that it saves money! At those stages, nobody wants to waste money unnecessarily on additional legal fees. Therefore, these investments have friendlier term sheets with significantly simplified processes. In more advanced stages, this would not be logical, nor wise, since larger investments without legal advice could have serious consequences.
Term sheet sections
Although term sheets will differ depending on the startup’s specific characteristics and the company’s needs as well as the investor’s, term sheets usually follow a general structure that can be divided into three basic sections:
- Investment-related aspects (funding)
- Management of the startup
- Future share settlement events
These sections generally contain the following terms:
- Parties to purchase of interest: Purchaser (Investor) and Company
- Proposed purchase price
- The valuation
- Shares and price
- Conversion options
- Statements and Assurances
- Non- Disclosure
- Non- Compete
- The Assigned interests are free and clear from obligations
- Terms and Conditions of the Series stock
- Liquidation Preference
- Conversion Rights
- Anti-dilution Rights
- Drag Along Rights
- Governing law
- Voting rights*
- Board seats*
- Anti-dilution provisions
- Deliverable at closing and Date of closing
*Depends on the investment amount
This article is not meant to provide legal advice. It should be understood as a simplified overview for readers to consult with their legal advisors as every situation is unique.