Term sheets are key documents when startups raise money. They lay out the basic rules for how investors and companies will work together. While they look simple, it's important to read them carefully. Let me show you how they work.

Let's break down what term sheets are and why they matter for startup funding. Think of a term sheet as a road map for your investment deal.


Why Term Sheets Matter

Most parts of a term sheet aren't legally binding, but they are still vital. The term-sheet helps both sides agree on the big points before spending time and money on legal work.

Once you’ve seen a few term sheets, they may all start to look the same. But the terms often contain nuanced language that can have a big impact on your deal.

Here's a tip: get your lawyer involved early. If you try to change key terms later, you might delay the deal and/or lose trust.

Legally Binding Terms

A few parts of the term sheet are legally binding:

• The "No-Shop" Rule: For a mutually agreed time-period, usually 60 days, you can't talk to other lead investors. Keep this time short to reduce risk

• Keeping Things Private: You can't share the term sheet details with others, except approved smaller investors (e.g. angels, family offices etc.)

• Legal Fees: Watch out for who pays the lawyers. Usually, companies pay when the deal closes. But some term sheets make companies pay even if the deal falls through

What to Watch For

The Board

Think about:

• How many shares investors need to keep their board seat
• What happens to founder's board seat if they leave the company
• Rules about the CEO's board seat

The Money

For funding rounds with a set price:

• Know how the valuation is calculated
• Understand the employee stock pool
• Ask for a clear picture of the Cap Table, i.e., who owns what after the deal

Founder Shares

Clear this up early:

• Are founders getting more shares/warrants?
• Do founders need to earn their current shares over time?
• Any special rules for founder shares?

Making It Work

A good term sheet helps deals go smoothly. Even though many term sheets look alike, small differences can have big effects. Read everything carefully. If something isn't clear, ask questions.

Here's the key: don't rush. Take time to understand what you're agreeing to. A clear term sheet leads to faster deals and better relationships between companies and investors.

Quick Tips

• Read the whole thing before signing
• Ask your lawyer to review it
• Understand how your ownership might change
• Know what happens if things go wrong
• Keep track of important dates and deadlines

Term sheets set the stage for your company's future. Taking time to understand them now saves headaches later.