A term sheet outlines the material terms and conditions of a business agreement. It serves as the template to develop more detailed legally binding documents.
Most negotiations for venture investment will begin with the term sheet. In it, the term sheet will summarize the terms the proposer (the issuer, investor or an intermediary) is prepared to accept.
Term sheet sections
The term sheet should consist of 3 sections:
- Corporate Governance
Within the context of venture capital financing, some important terms to startup founders and venture capitalists are:
- Valuation: A common struggle we see with young entrepreneurs is that they can way overestimate their value. This can cause a problem as a higher valuation is not always good because that can lead to a down round and other issues if you do not meet expectations.
- Control: A very common requests is some form of control via the board of directors. Most VCs that we work with has no interests in being the ones controlling the Board per se. Running a startup is not their main job and they are not subject matter experts in the area that you work with. The Board is set up to ensure corporate governance is in place.
- Liquidation: In the event of a company sale etc, how much will the founders receive? It is important to have it as the ultimate goal is to make returns.
- Founder vesting: This plays a major role in motivating the founders
- Voting rights: Voting rights are very important to the investor in this case for them to demand rights of whether to accept or reject actions taken by the founders such as sale, additional financing and other matters that should be approved by a certain percentage of Series A Preferred stockholders (the VC).
Back in October 2018, the Singapore government took steps to boost Singapore’s appeal as a regional hub for startups and venture capital investments. The result is The Venture Capital Investment Model Agreements (VIMA) launched by the Singapore Academy of Law (SAL) and the Singapore Venture Capital and Private Equity Associaton (SVCA).
“this initiative complements the national efforts to foster the growth and vibrancy of the venture capital ecosystem in Singapore; and we also expect the VIMA will play a key role in driving the adoption of Singapore law for early-stage financing transactions as the model agreements will all provide by default that they are to be governed by Singapore law and that any disputes arising therefrom will be resolved in Singapore. ”Chief Justice Sundaresh Menon
Find out more from our ‘Term of the Day‘ posts to learn about other terms that you may find beneficial as a startup founder.