• About Us
  • Write for Us
  • Paid Content Solutions
  • Contact Us
ExpertHub
  • HOME
  • LAUNCH
  • BUSINESS
  • LEADERSHIP
  • MONEY
  • SUCCESS
  • NEWS
    • All
    • Company Posts
    • ExpertHub Today
    Transunion Global Capability Centres Boom

    Global Capability Centres Boom As They Move Up The Value Chain

    Global Tech companies

    Global Tech Companies Are Turning To South Africa For Media And Marketing Expertise

    Innovation Summit

    Innovation Summit 2021 Showcases SA’s Top Tech Entrepreneurs

    Three customer experience strategies you’re missing-23Sep21

    Three Customer Experience Strategies You’re Missing

    Embracing digital 1st world, SMBs confid. to thrive-23Sep21

    Embracing A Digital-First World, SMBs Can Have The Confidence To Thrive

    SAB Foundation Calling All Entrepreneurs Tholoana Entps. Prog.

    Applications for SAB Foundation Are Now Open

    Trending Tags

    • About Us
      • Write for Us
      • Paid Content Services
      • Contact Us
    No Result
    View All Result
    • HOME
    • LAUNCH
    • BUSINESS
    • LEADERSHIP
    • MONEY
    • SUCCESS
    • NEWS
      • All
      • Company Posts
      • ExpertHub Today
      Transunion Global Capability Centres Boom

      Global Capability Centres Boom As They Move Up The Value Chain

      Global Tech companies

      Global Tech Companies Are Turning To South Africa For Media And Marketing Expertise

      Innovation Summit

      Innovation Summit 2021 Showcases SA’s Top Tech Entrepreneurs

      Three customer experience strategies you’re missing-23Sep21

      Three Customer Experience Strategies You’re Missing

      Embracing digital 1st world, SMBs confid. to thrive-23Sep21

      Embracing A Digital-First World, SMBs Can Have The Confidence To Thrive

      SAB Foundation Calling All Entrepreneurs Tholoana Entps. Prog.

      Applications for SAB Foundation Are Now Open

      Trending Tags

      • About Us
        • Write for Us
        • Paid Content Services
        • Contact Us
      No Result
      View All Result
      ExpertHub
      No Result
      View All Result
      Home LAUNCH Funding Venture Capital

      Venture Capital 101: The Ultimate Guide To The Term Sheet

      Ya-Fan Wong by Ya-Fan Wong
      Aug 24, 2018
      in Venture Capital
      209
      venture-capital-terms
      Share on FacebookShare on TwitterShare on LinkedIn

      RelatedTopics

      5 Steps To Set Yourself Up For Venture Capital Investment

      What Funders Look For From The Funder’s Perspective

      7 Questions A Venture Capitalist Will Ask You Before Investing In Your Business

      The importance of a term sheet in the context of raising funds through venture capital should not be overlooked. If you think of the ongoing relationship between you and the investor as a marriage, then you can think of the term sheet as the antenuptial agreement.

      The term sheet is the document that outlines the terms by which an investor (angel or institutional), will make a financial investment in your company. The term sheet is crucial as it usually determines the final deal structure with your investor – it outlines the terms by which your investor will make a financial investment in your company.

      Finding an investor can be complex and time consuming. Once you’ve found one with the right strategies and values, you may be tempted to rush through negotiations to access the promised cash injection. There can be serious ramifications if the details of the deal are not negotiated on a level playing field, and this is where the importance of a term sheet comes in.

      A term sheet exposes the bare bones of the fundamental commercial terms of the investment. Due to its concise nature, the involved parties are less likely to miss essential details.

      The term sheet

      The term sheet is intended solely as a summary of terms for discussion and agreement between the parties. Except for the confidentiality provisions, nothing should create any legally binding obligations on the part of the parties until they execute the definitive written agreements, obtain all the corporate and legal approvals, and successfully close the deal by meeting all the conditions precedent.

      The advantage of the term sheet in this respect is that it expedites the investment process by outlining the material terms and conditions, and guides legal counsel in the preparation of the proposed final agreements. It also allows you and your investor to get to grips with the terms quickly and provide input from each of your unique perspectives.

      What to look out for in a term sheet

      venture-capital

      Valuation

      Your investor will place a valuation on your start-up company based on, among other things, comparisons to other companies in the marketplace and recent transactions. It is common to set the valuation of the start-up company as a “pre-money” valuation (i.e. the value of the company before the investors in the funding round participate). This is, however, not always the case – so be sure to get clarity on this, as investing pre-money or post-money can make a big difference in the equity stake you are giving away in your company.

      If the parties are not in agreement about the valuation of the company, consider making provisions for claw-back provisions in favour of the start-up company or payment by the investor in tranches, which will be determined as and when the company’s audited financial statements indicate its valuation.

      Type of shares offered to the investor

      You will want to understand the type of shares you are giving away to the investor in return for the investment. Will you be giving the investor ordinary shares or preferred shares? Large investors are often only concerned with two things: Control and economics. As such, investors will often insist on acquiring a separate class of preferred shares which entitles them to fixed returns, the payment of which often takes priority over ordinary share dividends.

      Liquidation preference

      This is what is used to determine how the money is shared once the liquidity event happens. The preferred shares might have a liquidation preference of 1x the ordinary shares. That means that when the company is sold, the preferred shareholders will be paid first and then the ordinary shareholders.

      As a start-up founder, you need to know what you are promising your investor.

      Employee share ownership

      These are shares which are set aside to be issued to employees, advisors and others during the investment round. Having available shares for this purpose is important, as they are needed to bring in new talent. This pool of shares is typically part of the pre-money valuation of the business. You need to understand this concept because these shares can dilute pre-money shareholdings.

      Founder vesting

      The vesting period for founder shares is ordinarily three to four years. From an investor’s point of view, they want to make sure that you, as the founder and key members of the management team, are locked in and stay invested in the company.

      It’s worth noting that many of the vesting provisions are subject to the founder meeting pre-determined performance milestones and continuously adding value to the company. After all, the investor took interest and invested in the venture because they believed in the founder team.

      Anti-dilution

      This is an important provision to look out for as it protects the investor’s investment if the start-up company raises an additional round of funding at a lower valuation.

      Your investor may allude to this in the term sheet and require you to include an anti-dilution clause in the final agreements. Venture capital investors take significant capital risks and they will always seek to minimise their investment risk however they can. It’s important that you understand the effect of anti-dilution clauses on both future capital raisings, as well as your interests generally.

      Raising venture capital is a crucial, and often fragile, step in any start-up business’ journey to success. Make sure you get guidance from a legal team that is specialised in commercial and start-up law from the start.

      Ya-Fan Wong

      Ya-Fan Wong

      Ya-Fan served his articles at Dommisse Attorneys and was admitted in 2015. He is currently in our Corporate and Commercial division, and is responsible for the firm’s company secretarial unit, offering a value-added service to clients, beyond just the incorporation of a company, to include maintaining of share and director registers and assisting with annual returns.

      Quick Links

      • Business Plan Advice
      • Business Plan Format Guide
      • Business Plan Format
      • Sample Business Plans

      NEWSLETTER SIGN-UP

      Sign-up for Weekly ExpertHub Updates

      * indicates required




      EXPERT INSIGHTS

      RevenuePartners Time Management for Sales Teams

      Advice from RevenuePartners to hack sales team productivity

      by Andrew Honey

      Time management is one of the costliest challenges in business today. Here are 6 hacks from RevenuePartners to help you...

      Top Reasons Why You Should Study Business Administration

      Top Reasons Why You Should Study Business Administration

      by Adrian Lomezzo

      Administration course, these reasons should help you make the right choice

      Effective Video Strategies For Your Online Store

      Effective Video Strategies For Your Online Store

      by Frank Hamilton

      Video marketing is an incredibly powerful digital marketing technique. Here’s how you can use it for e-commerce to promote your...

      Top salespeople use 1 simple strategy to outperform everyone else

      The Top 1% of Salespeople Do One Thing Differently That Sets Them Apart

      by Max Landesman

      Top Salespeople Use This 1 Simple Strategy To Outperform Everyone Else

      • HOME
      • LAUNCH
      • BUSINESS
      • LEADERSHIP
      • MONEY
      • SUCCESS
      • NEWS
      • About Us
        • Write for Us
        • Paid Content Services
        • Contact Us
      • About Us
      • Write for Us
      • Paid Content Services
      • Contact Us
      • Terms & Conditions
      • Data Privacy Policy
      • Privacy Policy
      • Sitemap

      Copyright © 2022 ExpertHub.info
      Revenue Growth Experts

      No Result
      View All Result
      • HOME
      • LAUNCH
      • BUSINESS
      • LEADERSHIP
      • MONEY
      • SUCCESS
      • NEWS
      • About Us
        • Write for Us
        • Paid Content Services
        • Contact Us

      Copyright © 2022 ExpertHub.info
      Revenue Growth Experts

      Login to your account below

      Forgotten Password?

      Fill the forms bellow to register

      All fields are required. Log In

      Retrieve your password

      Please enter your username or email address to reset your password.

      Log In