This article is part of ‘The VC Series’, a series of articles aimed at founders who are thinking of raising funds from VCs. Further information about The VC Series can be found here.
As a founder, you may have already spent weeks or months pitching your business to prospective investors, so it is often a milestone achievement to have got to the position where a VC sends you a detailed term sheet. But what exactly is it and what should it include?
The term sheet is a key document in the fundraising process and sets out the basis on which it is proposed that the investment is made.
It is typically prepared by the ‘lead investor’, being the investor that is contributing most to the investment round and who is fixing the value at which other investors can also invest.
Whilst term sheets can sometimes feel like a protracted exercise, there can be considerable benefit to having a well drafted and properly negotiated document – for example:
Given the importance in getting the term sheet right, it is important that you engage with lawyers who are familiar with the concepts involved and who can help get the transaction started on the right foot. A good lawyer will also help you focus on the key issues – it is important that you pick your fights wisely!
Term sheets are not intended to be legally binding, and it is important that this is stated clearly in the document. Instead, they set out the blueprint of the investment, with any legal obligation being conditional upon (i) the negotiation and execution of the long-form documentation, and (ii) certain other conditions which need to be met before the investment is completed (the concept of conditions precedent will be dealt with in more detail in a later article in The VC Series).
There are though some important exceptions to this:
We will explore some of the key provisions of a VC Term Sheet in future articles, but they can generally be grouped as follows:
As you can see, you can expect a Term Sheet to cover a lot of different items, and the terms can get complicated quickly. It’s therefore important that you get legal advisors involved as early on as possible, as you will find it difficult to persuade the VC to agree to different terms after the Term Sheet has been signed.
The British Venture Capital Association (BVCA) is the industry body for the private equity and venture capital industry in the UK, and they have a standardised set of documents for early stage VC investment – included within these is a form of term sheet for Series A investments which can be found here.
The next article in The VC Series will deal with due diligence, explaining what a VC will typically be focussing on and what you can do to make the process as plan sailing as possible.