The VC Term Sheet Decoded

= [ The] ... DE;0 BED TERM SHEET EXAMPLE TERM SHEET FOUNDRY VENTURE CAPITAL 2011, L.P. Terms for Proposed Private Placement of of Series A Preferred Stock of [ - 2011 (Valid for acceptance until 5:00 pm 2011) 1ssuer: a (Delaware) corporation (the "Company") Amount of Financing: VALUATION Investorlsl: The most important term on the entire term sheet. A combination of your company's past performance, projected performance, and perceived value of your intellectual property. Your valuation is a key figure that will dictate how much capital you can expect to raise. It also dictates the size Closing: of your company's pie, which is important when it comes to Price Valuation: Liquidation Preferences. Type of Security: Mendelson's Tip: Board of Directors: Make sure you get a "fair" deal over the "best" deal, Believe it or not, we don't generally see Except for the provisions conti Agreement", "Confidentiality be binding upon execution of tions, is not intended as a lega is subject to the following cond Investors, satisfactory completie deseribed in the definitive agrer too much quibbling over valuation numbers. Foundry Venture Cap BOARD OF DIRECTORS By: Print Name/Title Investors in your company will generally want to secure a board position so they can protect their investment. While this doesn't include everyone who invests a dollar in your company, a seat on the board is expected by more significant investors and venture capital firms. Capitalization: Mendelson's Tip: Don't let investors take control of the board. We've found that best functioning structure is Dividends: a board evenly balanced between company, Liquidation Preference: investors, and outsiders (such as industry experts). ting prefetred: After the the Series A Preferted, the LIQUIDATION ers of the Common Stock PREFERENCES preferred with a cap: After s of the Series A Preferred, olders of the Common it basis; provided that the they have recelved a total the Purchase Price, plus any This is how your company's pie gets eaten and by whom upon merger or acquisition. Investors will recoup their investment ig assets shail be distributed iquidation or deemed first and maybe even some multiple on top of this, and then tled to receive the greater shareholders will receive payout based on percent ownership he prior sentence, or (i) iversion of the Series A in the company. iting preferred: After the the Series A Preferred, the Mendelson's Tip: ers of the Common Stock.] hareholders of the Company viving corporation or sale of e deemed to be a liquidation. ther contingent What you give away early on will be asked for later-and perhaps then some. Don't get too Sck. hpadoad sunoue nuadu fancy here; remember to keep it simple. 1e election of each holder. nt as providod below all automatically convert into pabic offering of shares of PROTECTIVE PROVISIONS The good news is that these are rarely a hot topic of negotiation. The bad news is that these are all of the things Protective Provisions: you can't do without the approval of your investors. Be sure you understand every provision in this section so your company can get done what needs getting done without holdups and hand-smackings. Mendelson's Tip: Hey, we wrote the book to help founders be just as smart, if not smarter, than their VCs Information Rights: and attorney. But here's a case where a session with your attorney isn't a bad idea. Registration Rights: the Closing or 180 days after the Company's initial public offering, sa lIong as the EMPLOYEE POOL Right of First Refusal: This is the amount of stock that your company will set aside for future employees, consultants, directors, and officers. Remember, this comes out of your portion of the company as EMPLOYEE MATTERS Employee Pool: founding members, not the portion of incoming investors. You'll want to reserve enough to make the hires you need, but not so much that you are over-diluted. Stock Vesting: Mendelson's Tip: If you find yourself in a heated debate here, consider that your vision of future hiring needs might not align with those of your proposed investors. Are these the right investors for your company or do your expectations need to be adjusted? on all transters of Common Stock, subject to normal exceptions. It the Company elects not to exercise its right, the Company shall assign its right to the Major Investors, (The Company's Bylaws shall also contain a provision providing that no shares of capital Published on OPENForum.com Design by Katie Daly Compiled by Erika Napolitano Sources: Erika Napolitano, Jason Mendelson, Foundry Group OPEN Forum