TL;DR - Founders should spend time negotiating their term sheets, hire an experienced attorney, and understand the key provisions that apply to preferred stockholders.
Helpfulness - 4
Tags - term sheet, term sheet negotiation, term sheet advice, venture capital, VC
- What is a term sheet?
- Why is a term sheet important?
- Why should founders hire an experienced lawyer?
- Why should founders understand provisions that apply to preferred stockholders?
- Founders should make the most of their term sheets.
- A term sheet is a formal document briefly laying out the initial agreement between a founder and a venture capitalist.
- Although not legally binding, the term sheet is the chief document used by legal counsel to prepare the final agreement and to resolve any disputes.
- Founders should hire the right lawyer.
- Highly experienced lawyers know how to close deals, anticipate pitfalls, and proactively take care for logistic weeks before they are needed (e.g. obtaining wire account information and bank routing numbers).
- They will ensure the corporate legal aspects of the VC-funded company are set up properly.
- Founders should know the difference between the terms of preferred and common stockholders.
- If founders decide that they want to sell some of the shares to a third party, preferred stockholders must be given the right to purchase them first; which can affect business decisions that founders may want to make (e.g. offering stock option to entice a prominent businessman to join the board of directors).
- Preferred stockholders are often given co-sell rights or “tag-along rights” which allow a minority shareholder to sell stakes in a company if he/she wants to.
- Preferred stockholders are often given liquidation preferences.
- Founders should be aware of the control they give to preferred shareholders, especially the investor who has the majority of preferred stock.
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