Hi, everyone. This is Alejandro Cremades, and today we’re going to be talking about
what is a term sheet? Essentially, if you’re fundraising, and if you’ve gotten to that
point where a venture capital firm or any other investor is excited about making an
equity investment in your business – that is, essentially, giving you money and receiving
a piece of the pie – getting equity ownership in your business before you even pursue to
get the offering documents, which are those binding agreements that are outlining everything;
you’re going to be presented with a term sheet. So, with that being said, let’s get
into it. What is a term sheet? A term sheet is a nonbinding
document. It is a one or two-page document that outlines. It’s just a promise. It’s
a promise that outlines what will be those proposed terms that are going to come afterward
in a potential set of offering documents. The thing about term sheets is that they’re
not binding, meaning that even if you sign the term sheet with the investor, it doesn’t
mean anything. They are not responsible for financing the investment after that.
I have seen the mistake that many founders make in which they receive a term sheet; they
get excited; they start hiring like crazy, and then, eventually, that investor doesn’t
follow through, and then they’re stuck holding the bag.
So, be very careful and just really know that ultimately a term sheet is only a promise.
It’s not a commitment. Do not try to increase the spend or anything like that until the
money is in the bank. Some of the common things that you’re going
to find on the term sheet are going to be: • Who is issuing the note or stock?
• The type of collateral being offered • The valuation
• The amount being offered • The shares and the price
• What happens on liquidation or IPO? • The voting rights
• The board seats • The conversion options
• The anti-dilution provisions • The investor rights to information
• The founder’s obligation • Who will pay for legal expenses?
• Nondisclosure requirements • Rights to future investments
• Signatures Obviously, out of all of these different terms,
the most important ones are essentially the valuation that you’re putting on the business
and the type of shares that you’re giving, whether they’ve common or they have some
type of preference. And then, of course, the board seats that
you’re giving away because with the board seats, you are giving out control of your
business. You’re giving out the possibility for other people to have a say in the matter
and to have a contribution when it comes to being at a strategy level on the board of
your business. Typically, it depends, from financing cycle
to financing cycle. At a seed-stage level, you’re looking at giving away one board
seat. On a Series A, you’re giving away maybe two to three board seats, and so forth
all the way up to Series B, where you go all the way up to perhaps nine seats on the board.
The next steps after you receive the term sheet is, you really want to push the investor
to give you the offering documents. You want to agree on the term sheet.
Then after the term sheet is received and is signed between both parties, there’s
going to be that due diligence process where the investor is going to take a look at some
of the claims that you have been making to make sure that everything is confirmed and
that you haven’t lied about anything or that anything was not taken out of context.
Then after the due diligence is approved and passed, then you go to signing the offering
documents, and then the money is wired into your bank account.
With that being said, hopefully, you liked this video. Make sure that you click the Like
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And take a look at the fundraising training, too, which is the program where we help founders
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other, and I think that would add a tremendous amount of value to you as you’re looking
at raising money. So, with that being said, thank you so much
for watching.