Term Sheets

WHAT

A major learning category and module of New Venture Finance. What is a term sheet? It's essentially a document that formalizes the structures of the equity-for-funding agreement you make with (usually) a private equity firm like venture capitalist. Here you'll you get an introduction to the most important deal terms you might see in a term sheet, how preferred stock shares differ from common shares, and learn some VC jargon commonly used in term sheets, such as pro rata, fully diluted, and pari passu. 

Learning Objectives

At the end of this module you should be able to:

• Explain what a term sheet is and how it is used in a private equity financing deal with venture capital investors

• Describe the five major points of negotiation between the founders and the investors when dealing with term sheets

• Determine the fully diluted number of shares that have been issued or promised to the various stakeholders in your startup

• Explain the terms "participating" and "capped participation" in the language of term sheets and what they mean to you and your earlier-stage investors

Instructions

• Watch the assigned videos and presentations; 

• Read the assigned readings; 

• Complete the practice quiz or other assigned practice activity

• Complete the assessment;

• Complete the "Mark as Complete" checklist.

Read

Deal Structure Note - Tuck School of Business (Dartmouth College, 2002)

A Complete Beginner’s Guide to VC Term Sheets, (Fundingnote.com, 2016; note: ROFR means "right of first refusal")

Stones Unturned: An Investor's Guide to Due Diligence in Early Stage Companies (Seraf-compass, 2016)

Documents

Your mindset as you review these forms is "view and find patterns"

• Cooley’s forms.

• Orrick’s forms.

• Series Seed forms created by Fenwick.

• The NVCA forms.(many updated July 2020!)

• Gunderson’s document library.

• Y Combinator Series AA Termsheet (Word)

• Y Combinator Series AA Termsheet (PDF)

NVCA Forms

The NVCA updates "model" documents across the spectrum of legal forms and provides these for FREE. If you want to dig into the legalese and details of the different forms and documents you'll need in your startup, here you go. I consider this an essential resource for private equity finance.

Sheets

Example Cap Table with anti-dilution clause exercised (Google sheet)

Practice

Assessment - Graded Activity

We will NOT use this graded activity in Fall 2023

References

Feld, B., & Mendelson, J. 2019. Venture Deals: Be Smarter than Your Lawyer and Venture Capitalist, 4th Ed. Wiley.

Poland, S.R. 2016. Term Sheets & Preferred Shares. Founder's Pocket Guide Series. 1x1 Media: Asheville, NC.

Wilmerding, A. 2004. Term Sheets & Valuations: A Line by Line Look at the Intricacies of Term Sheets & Valuations. Aspatore. 

Mark as Complete