What is a term sheet and what are its key terms?

Full Explanation

Term sheets typically include: Investment Amount and Valuation (pre- and post-money); Stock Class and Rights (preferred stock with liquidation preference, participation rights, anti-dilution); Board Representation (investor gets 1 seat, founders typically have 2+ for early rounds); Protective Provisions (investor veto rights on major decisions like spending above budget, hiring above planned headcount, M&A); Anti-Dilution Provisions (broad-based weighted average or narrow-based; avoid full ratchet if possible); Opt-ion Pool (typical 15-20% for Series A); Drag-Along/Tag-Along Rights; Registration Rights (investor right to demand IPO registration); Information Rights (right to financial statements, board meetings); and Pro-Rata Rights (right to participate in future rounds). Term sheets are usually non-binding except for confidentiality and exclusivity (you cannot shop the deal to other investors for 30-45 days). Founders should engage a lawyer to review term sheets — seemingly minor terms can have enormous consequences. For example, full ratchet anti-dilution can make founders worthless in a down round; participating preferred can reduce founder exit proceeds by 50%+. Never skip legal review.

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