VCs usually have superior knowledge than founders when it comes to term sheets. It’s important that when founders look at a term sheet they can identify standard terms and provisions that address perceived investor risks.
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What should a good term sheet look like?
What term sheet provisions can be good for founders?
What do investors look for in a term sheet?
- Summary bullet points
- Founders usually have inferior knowledge than VCs when it comes to term sheets and might not know good from bad, especially in terms of control or structure
- In an example Series A term sheet, many terms can be negotiated depending on what the parties can leverage, but there are standards for what to expect
- Deal terms offered by investors highlight the risks they are most worried about
- Board structure provisions can lead to founders losing control of the big picture and potentially being replaced
- Investor director’s approval provisions can lead to founders losing operational control of the company
- Some investors try to address risk by adding conditional provisions that protect their investment and give them a fixed return if triggered
- Founders should try to steer them away from the latter and negotiate on valuation to address risk, while getting more standard terms
- The first term sheet sets the model for future term sheets, so it is beneficial to have a clean one that makes things easy and fast
- Follow-up links
What founders should know about veto and majority rights - https://medium.com/point-nine-news/founders-should-you-accept-veto-rights-at-all-5bd2229088bc
Do Venture Capitalists Always Get Veto Rights On A Company Raising More Money? - https://www.venturedeals.com/do-venture-capitalists-always-get-veto-rights-on-a-company-raising-more-money/
Control is a one way street - https://venturehacks.com/topics/protective-provisions