Simplifying the term sheet

Under start-up 101 lecture series, Shruti Devasthali offered a lecture on Simplifying the term sheet on 8th July, 2017.

The talk began with Shruti explaining the term sheet. A term sheet is a confidential and exclusive document which words the mutual understanding between an investor and entrepreneur. The term sheet post signature by both the parties is a binding document and is a valid for a definite period. However, it is not a legal document.
A term sheet covers:
– Investor details
– Details of the company in which investors are investing
– Details of the instrument against which the investment will be done
Includes: Equity, Preference shares (convertible/non, participating/non, cumulative/non), Convertible debt
– The actual investment details and agreed valuation of the company
Includes: Amount of investment, timing and frequency of investment, valuations at which investments are done (Pre/Post money evaluation), preference share (distribution of dividends based on % of interests), convertible instruments and basis of conversion
– Other terms of investment
Includes: Board seats distribution, Affirmative rights, anti-dilution, exit rights (IPO), Third party sale, promoter buy back), Drag / tag along, right of first refusal/offer, transfer restrictions, founders’ lock-in, lawyers’ fees

According to the speaker an entrepreneur should always do the following before signing a term sheet:
i. Understand the term sheet in depth
ii. Always consult your board of directors, advisers and peers
iii. Only accept the terms which are universally part of the investment agreement
iv. Spend time to understand the terms which are not general and are binding for the company

Author: Monish Deshmukh, BIRAC SIIP Fellow at Venture Center