How do you finalize a term sheet agreement?

1 What is a term sheet agreement?

A term sheet agreement is a non-binding document that outlines the main terms and conditions of a proposed investment by a VC in your startup. It usually covers topics such as valuation, ownership, board representation, voting rights, liquidation preferences, anti-dilution, vesting, and exit options. A term sheet agreement is not a contract, but it serves as a basis for drafting the final legal documents that will formalize the investment.

2 Why is it important to finalize a term sheet agreement?

Finalizing a term sheet agreement is important for several reasons. First, it signals that you and the VC have reached a mutual understanding and commitment to work together. Second, it helps you avoid wasting time and resources on negotiating with multiple VCs or pursuing other funding sources. Third, it allows you to focus on the due diligence process and the legal paperwork that will follow. Fourth, it gives you an opportunity to clarify any ambiguities, resolve any disputes, and optimize any terms that might affect your startup's future success.

3 What are the key terms and clauses to pay attention to?

When signing a term sheet agreement, there are several key terms and clauses you should pay attention to and understand. Valuation is the amount of money the VC thinks your startup is worth, which determines how much equity they will get in exchange for their investment. Ownership outlines the percentage of shares the VC will own in your startup after the investment. Board representation is the number and identity of the board members appointed or nominated by the VC to oversee your startup's governance and strategy. Voting rights are the rights that the VC and other shareholders have to approve or reject certain actions or decisions. Liquidation preferences are the rights that the VC and other shareholders have to get paid first in case your startup is sold or shut down. Anti-dilution are the rights that protect ownership percentage in case your startup issues more shares at a lower valuation. Vesting is the process by which you and your co-founders earn your equity over time. Exit options are the rights and obligations that the VC and other shareholders have to sell or buy their shares in certain circumstances. You should aim for a fair agreement that reflects your contribution and commitment, as well as leaves some room for future rounds of funding.

4 How do you negotiate a term sheet agreement?

Negotiating a term sheet agreement can be challenging and stressful, but it can also be rewarding and satisfying if you follow some best practices. Before entering the negotiation, it is important to do your research on the VC, their portfolio, their track record, their reputation, and their expectations. You should also know your own numbers, metrics, goals, and alternatives. During the negotiation, you should treat the VC as a potential partner by communicating clearly, honestly, and politely. Show respect for their time, expertise, and interests. Be confident and assertive about your startup's value proposition, vision, and potential while being flexible and creative about finding solutions that work for both parties. Leverage your strengths, your achievements, and your alternatives to create some urgency and competition. Do not be afraid to ask for what you want and challenge what you don't like; if you don't get a fair deal, walk away.

5 How do you close the deal?

Closing the deal is the final step of finalizing a term sheet agreement, but it is not the end of the journey. It involves several actions and precautions to ensure a successful transition from the term sheet to the final legal documents and investment. You should sign the term sheet as soon as possible to formalize your commitment and lock in the deal, and announce it to your team, customers, partners, and stakeholders. After signing, you and the VC will conduct due diligence to verify and validate information. Then, based on the term sheet and due diligence, you and the VC will draft legal documents that will govern the investment and relationship. Once signed, you will receive funds from the VC in one or more tranches depending on milestones and conditions. To increase chances of a favorable deal, prepare for negotiation, follow steps outlined in this article, use funds wisely, and report progress to VC.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?