A term sheet is a document that describes the agreement by which a startup acquires financing. Some use the phrase Term Sheet to describe the terms of any business agreement. You should always obtain advice from a lawyer before signing a Term Sheet.
Problems in a Bad Term Sheet
A bad term sheet may include the following types of problems. I suggest that you not sign such a term sheet.
- Bad Valuation
The bad term sheet may imply or understate the valuation of the company. Accountants and attorneys who are experienced with companies in your “age group” can help you understand a reasonable valuation for a company in your sector in your geographic area. You might get a better valuation in a different geographic area
- Too Much Equity
The bad term sheet may ask for too much equity in relation to the funding to be provided. Accountants and attorneys who are experienced with companies in your “age group” can help you understand what a reasonable offer might be for a company in your sector in your geographic area. You might get a better offer in a different geographic area
- Control Too Early
The bad term sheet may ask for control of the company at too early a stage. One example would be during Angel or Seed Stage financing rounds. In Silicon Valley the VCs plan to be in control of the company after the B Round; this is the second round of venture capital investing; which usually occurs after two rounds of Angel or Seed Stage investing. This is reasonable
- Control Over Sales
Some investors use a bad term sheet to be in control of the sales of the company. This essentially makes the founders employees
- Control Over Future Investments
Some investors use a bad term sheet to be able to control who can invest in the company in the future
- Predatory Terms Upon Exit
VCs may use a bad term sheet to ask for extremely favorable terms (for them) in the event of a poor exit. Unfortunately this happens all too frequently; you may have to accept this one.
- Control Over The Exit
Some investors use a bad term sheet to control the financial exit of the company
- A description of a Term Sheet is provided by Wikipedia.org on the page Term Sheet
- A sample Term Sheet is included in the Model Legal Documents section at the National Venture Capital Association Website
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