The Term Sheet
As discussed in this post, I am creating a new series that will cover important information that every founder should know before they try to raise their Series A. This post will give a general overview of what the term sheet is; with future posts covering the important terms typically found in the term sheet.
The Term Sheet, Generally
A term sheet is the most coveted document in the startup world. To put it simply, a term sheet is a document from an investor, usually a VC, that shows they want to invest in your startup. The term sheet is a negotiating tool that outlines the investment. It is full of important terms that will not only affect the round of capital you are raising, but also your startup and future rounds after closing. Therefore it is important that you take the time to read every term and consult an attorney who routinely handles these matters (i.e. a startup attorney, not a small business attorney). Term sheets vary in length, but most are only a couple of pages long, and all of them are largely non-binding.
With the term sheet being largely non-binding, meaning that the VC’s are not legally obligated to invest, many founders are afraid that the investment won’t actually happen. Rest assured, so long as you did not lie to the VC’s or there are no “skeletons in the closet”, a signed term sheet almost always leads to an investment. With it being non-binding, it is important that you do not fall into the trap of thinking that the terms can be renegotiated later. In a state of excitement, and an attempt to save on legal fees, I have had several clients rush to sign a term sheet thinking that they could change some terms before the definitive deal documents were signed. Unfortunately, they learned that absent a good reason as to why, changing or renegotiating a term after the term sheet has been signed rarely happens. This is why it is important to get a startup attorney who handles these matters early on in the process. If you receive a term sheet and haven’t talked to a startup attorney yet, you need to pause and speak with one before moving forward.
While receiving a term sheet is certainly something to be excited about, it is important to get good legal advice on the terms in it. Failure to do so, could have severe ramifications to your startup and future rounds.