What to Include
The Investor Term Sheet outlines the key terms and conditions that both the company and investors agree to when entering into a funding agreement. This section is crucial for setting expectations and ensuring both parties are aligned on critical investment points.
Core Elements:
- Investment Amount: The amount of capital the investor is committing.
- Valuation: The pre-money or post-money valuation of the company.
- Equity Stake: The percentage of the company the investor will own post-investment.
- Type of Security: Common stock, preferred stock, convertible notes, SAFEs (Simple Agreement for Future Equity), etc.
- Dividend Rights: Whether dividends will be paid, and under what conditions.
- Voting Rights: What rights the investor has in terms of voting on company decisions.
- Liquidation Preferences: The order and amount an investor will receive in the event of a sale or liquidation of the company.
- Exit Strategy: Plans or timelines for an exit, such as through an IPO, acquisition, or secondary sales.
- Use of Funds: How the raised funds will be allocated, including product development, marketing, hiring, etc.
- Board Seats: If the investor will have a seat on the company’s board of directors.
- Anti-Dilution Protection: Provisions to protect the investor’s equity stake if future rounds of financing are raised at a lower valuation.
- Rights of First Refusal & Co-Sale Rights: Whether the investor has the right to purchase shares before the company offers them to third parties or has the right to sell alongside the founders.
Where to Source the Information
- Legal Advisors: Work with legal professionals to ensure the term sheet complies with applicable laws and best practices.
- Valuation Reports: Use third-party reports or financial modeling to determine company valuation.
- Investment Criteria: Based on the amount of capital you need, investor expectations, and typical deal structures in your industry.
How to Analyze
- Negotiation Leverage: Evaluate how much leverage your company has when negotiating terms (based on demand for investment, growth potential, or traction).
- Investor Alignment: Ensure the terms align with your long-term goals (e.g., control of the company, funding needs, timelines for exit).
- Exit Scenarios: Consider different exit paths (acquisition, IPO, etc.) and how the terms will affect you as the company exits.
- Dilution Impact: Evaluate how much dilution will occur and how the investment rounds will affect ownership stakes.
Format and Structure
- Summary of Key Terms: Start with a table or bullet points summarizing the key terms for clarity.
- Detailed Breakdown: Go into more detail on each term, providing context where needed.
- Signatories and Dates: Clearly outline who will sign the agreement, and include the relevant dates.
With this section, investors will have a clear understanding of the terms you are offering, and they can assess whether the deal meets their expectations. It’s critical to be transparent and thorough, as this is a key part of the investment decision-making process.