- What is a Term Sheet by the way?
Imagine that, on a beautiful day, founders of a Vietnamese startup just received a ‘term sheet’ from a venture capitalist (VC for short) after several rounds of discussions. The document may contain a generous dose of jargons they never heard before (e.g. – liquidation preference, pre-money valuation, fully-diluted, weighted average, etc. just to name a few). For those who just see it for the first time, they may be totally confused and have no ideas what should do next with the document (at least, this is what I have been told by startups’ founders several times).
Nevertheless, beyond the veil of these legal niceties lies a much simpler commitment contents of which are, more often than not, highly standardized.
Simply put, a term sheet is basically a set of agreed general terms of an investment deal between a startup and its investor(s), most likely venture capitalists. These general terms deal with various issues ranging from the size of the investment, startup’s valuation, board composition to ultimate equity ownership of the investors. Nevertheless, what is considered the most important is agreements on preferences and protections that the investors wish to establish, especially upon the occurrence of specific circumstances (e.g. – IPO, the startup’s liquidation or a ‘down round’, etc. just to name a few).
In a nutshell, a term sheet focuses on two key aspects of an investment transaction being (i) economics of and (ii) control by the investors. After all, aren’t these points shadow what we are pursuing in transactions of all other kinds?
- What is a term sheet’s essence?
While economics and control serve as two pillars of a venture deal, digging deeper, what a term sheet may cover could expand further to following key categories:
- financial deal points: investment amount, the pre-money valuation of the startup, the stock price, and other direct financial elements of the deal.
- preferred share rights of the VC: liquidation preferences, anti-dilution rights, and participation rights.
- other investment prerequisites: founder employment agreements, non-competition among founders and other high-ranking managerial positions, IP right agreement, etc.
- control and protection in favor of the VC: VC’s appointment of its person to the board of target, voting right agreement, protective provisions, tag-along and drag-along rights, etc.
 Founder’s Pocket Guide: Term Sheets and Preferred Shares (Stephen R. Poland)