Source - https://www.forbes.com/sites/ryanwestwood/2016/09/06/how-to-negotiate-a-term-sheet-with-a-vc/#7d47cd357806

TL;DR - Founders should spend time negotiating their term sheets, hire an experienced attorney, and understand the key provisions that apply to preferred stockholders.

Helpfulness - 4

Tags - term sheet, term sheet negotiation, term sheet advice, venture capital, VC

Questions answered:

• What is a term sheet?
• Why is a term sheet important?
• Why should founders hire an experienced lawyer?
• Why should founders understand provisions that apply to preferred stockholders?

Summary:

• Founders should make the most of their term sheets.
  • A term sheet is a formal document briefly laying out the initial agreement between a founder and a venture capitalist.
  • Although not legally binding, the term sheet is the chief document used by legal counsel to prepare the final agreement and to resolve any disputes.
• Founders should hire the right lawyer.
  • Highly experienced lawyers know how to close deals, anticipate pitfalls, and proactively take care for logistic weeks before they are needed (e.g. obtaining wire account information and bank routing numbers).
  • They will ensure the corporate legal aspects of the VC-funded company are set up properly.
• Founders should know the difference between the terms of preferred and common stockholders.
  • If founders decide that they want to sell some of the shares to a third party, preferred stockholders must be given the right to purchase them first; which can affect business decisions that founders may want to make (e.g. offering stock option to entice a prominent businessman to join the board of directors).
  • Preferred stockholders are often given co-sell rights or “tag-along rights” which allow a minority shareholder to sell stakes in a company if he/she wants to.
  • Preferred stockholders are often given liquidation preferences.
  • Founders should be aware of the control they give to preferred shareholders, especially the investor who has the majority of preferred stock.

Follow up links: