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Term sheets follow a standardized structure. They might differ from fund to fund, but there’s a couple of terms that most probably will be included in all the term sheets out there. Below you can find a list of the terms included and what they indicate.
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| Terms | Description |
|---|---|
| Investment and Round Size | A specific description of the investment by one or more investors, the round size, and ideally also the dilution. |
| Type of Security | Depending on the number of previous financing rounds, there might be different share classes already. The shares created when founding a company usually are common shares. Investors, however, most of the time want preferred shares that have superior rights to the common shares. |
| Virtual Stock Option Plan | This section specifies the number of VSOPs already created as well as the potentially to be created size of the new pool to be created in the upcoming round. |
| Valuation | Outline of the amount that the company is valued at in this specific round. Especially in the early stages, the valuation is a function of finding the maximum between capital requirements of your company, the overall dilution, and the target shareholding of the new investors. Read more in this Sifted article. |
| Liquidation Preference | There are several options for liquidation preferences that need to be specified in case of a liquidation of certain shares. Differentiate between (non-)participating liq prefs. Read more in this article. |
| Anti-Dilution Protection | A provision that protects investors from dilution caused by future equity issuances at a lower price than the investor paid. |
| Voting Rights | The rights of investors to vote on company matters. Specifics are defined in the final documentation. See this link for the items that are up for discussion. |
| Advisory Board | With a new group of investors the constellation of the advisory board will also change. This section specifies the number of board seats and the persons being appointed as board members. |
| Founder Undertakings | Promises made by the company's founders regarding their involvement in the company and its success. These also include abstracts on, e.g. non-compete clauses. |
| Vesting | A detailed definition of the percentage of the founders’ shares being vested as well as an outline of the general vesting period. Especially in the early stages, the founding team is the driving force of a startup and thus is crucial for its success. That’s mainly the reason for the implementation of such a vesting scheme. |
| Right of First Refusal | A provision that gives shareholders the right to purchase an other shareholder's shares before they are sold to a third party. |
| Drag-Along | A provision that allows a majority of shareholders to force a minority shareholder to sell their shares in the event of a company sale. |
| Closing Conditions | The conditions that must be met before the investment can be closed. |
| Expenses | The expenses that will be borne by the startup in connection with the external due diligences conducted in regards to the investment. These expenses grow with increasing maturity of a company, as more details need to be audited. In most cases, the technical and legal DD account for the greatest expenses. |
| Exclusivity | A provision that prohibits the startup from negotiating with other potential investors during a specified period of time. This helps the investor to really dive into the details behind the startup without having to watch out for other investors taking over the deal. Don’t worry - if you’ve already reached the stage of negotiating the term sheet specifics and aren’t hiding anything crucial, the investor is already very much convicted! |
Financing structure
Rights and preferences
Click this page to dive into voting rights:
Other legal terms
Further procedure
One more thing 🚨 It is best to consult with your lawyer during this part of the process, just to be safe.
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