Form Of The Proposed Term Sheet: Fill & Download for Free

If a company is attractive enough for at least one investor to propose a term sheet (assuming it’s not a totally bogus, predatory term sheet), that company is likely to get funded in one form or another. It may not be that particular term sheet — perhaps the company parlays their first term sheet into several more, and picks the best one after some back-and-forth negotiations among potential investors. Or maybe the company likes that firm but needs the terms to budge on a few key points. But they’ll probably get a deal done somehow.Right now, with the market feeling pretty defensive, there’s a high bar for companies to elicit a term sheet from the investor community. But the companies that get can a term sheet are often able to find 3 or 4 more. It’s classic 80/20 rule — 20% of the companies get 80% of the term sheets. Actually it’s probably more like the 98/2 rule at the moment.The rich get richer.

It all starts with the term sheet. And ends with everything else.After some preliminary due diligence, if a VC is interested in making an investment then they will issue a term sheet outlining all of the key economic and governance features of the proposed investment.This term sheet is mostly non-binding. The one binding part of a term sheet is an exclusivity period you grant the VC during which time they conduct their detailed due diligence and the company can’t solicit offers from other VCs. If the diligence goes well then you move to closing the deal on the terms outlined in the term sheet. If it doesn’t go well then the VC may re-negotiate the terms of the deal or walk away.There are no other documents generated prior to the closing of the deal - just the term sheet.At closing there are a lot of documents generated and/or amended to reflect the terms of the transaction. The main new document is the purchase agreement related to the new securities. The company should already have the other core documents which will/may be amended to reflect the terms of the VC investment. These include the Articles of Incorporation, Shareholder Agreement perhaps management contracts etc.Generally, an entity is formed prior to going to get a VC investment which would require some core documents like the Articles and Shareholder agreement to be generated. It’s important to engage a good lawyer that focuses on working with start-up companies to get your ducks in order prior to seeking VC or angel financing.

Yes. After learning hard lessons about the tension between investors and founders, I teamed up with my former business partner, Dan Flanegan, and my attorney, K. Adam Bloom, to create an open-source standard that you can attach to any bylaw agreement, term sheet, employment agreement, etc.It’s called the Founder Friendly Standard. It has 17 sections that can lay common disputes to rest such as who gets to vote, who gets liquidation preferences, what is the scope of non-compete, etc.Here are (3) three of the juiciest sections:1.1 Individuals who work for the company and are instrumental in its inception (“Founders”) receive a class of equity such as Common Stock which provides no less than twenty-four (24) votes to one (1) vote of stock held by investors or employees.If you’re the founder, why not control your own company? This can lead to better business performance for investors according to Credit Suisse’s Family 1000 research[1].2.1 Founders agree in writing they will give and receive performance reviews at the end of each fiscal quarter for the first four (4) years.Have you ever seen conflict fester and erupt? Famous examples include Bill Gates & Paul Allen, Evan Spiegel & Bobby Murphy, and Mark Zuckerberg & Eduardo Saverin. This provision facilitates giving and receiving feedback at least every quarter to address conflict before it becomes a risk to your startup.3.2 For at least the first two (2) years of operations, the company does not agree to binding arbitration with any investor.It’s a known fact that forced arbitration between parties of unequal bargaining power[2] is unfair. And since arbitration is often more expensive than regular court, wouldn’t it be in the investor’s best interest to go along here to save costs?The full text of Founder Friendly Standard is available here. I encourage you to read it and send it to your attorney for your next conversation. See the “Quick Links” menu at the top of the standard. If you are papering a deal, your attorney can download and customize our free template term sheet. If an investor sent you paperwork, your attorney can compare it to the Founder Friendly Standard with our free attorney review form. You can download these resources without even providing your email address.Our attorney review form helps you organize analysis of the legal issues that can determine whether you run your startup or take orders from investors. We used the same review form as a starting point for the below infographic which compares popular term sheets to Founder Friendly Standard.Founder Friendly Standard v. other term sheets [Infographic]Click for an interactive infographic comparison of Founder Friendly Standard to term sheet templates like the Y Combinator Safe, 500 Startups KISS, NVCA Model Legal Docs, etc. In the interactive version, you can click on individual bars to reveal attorney commentary about each issue.What’s in it for investors?Healthy financial returns. I’ve researched how the Founder Friendly Standard combined with optionality can deliver better returns than today’s angel investing and venture capital methods. The book is called: Grays Sports Almanac for Venture Capital: A new standard for optionality to beat the odds.Footnotes[1] https://www.credit-suisse.com/media/assets/corporate/docs/publications/research-institute/the-cs-family-1000-in-2018-en.pdf[2] unequal+bargaining+power+arbitration+unfair - Google Search