What are the best ways to evaluate term sheet provisions?

1 Valuation and Capital

The valuation and capital section of the term sheet determines how much your startup is worth and how much money you are raising from investors. This section is usually expressed as a pre-money valuation, which is the value of your startup before the investment, or a post-money valuation, which is the value of your startup after the investment. Furthermore, the capital is the amount of money that investors are willing to invest in your startup, in exchange for a certain percentage of ownership or equity. When evaluating this section, you should assess how realistic the valuation is based on your startup's stage, traction, market size, and growth potential. Additionally, consider how much dilution you are willing to accept in terms of equity and control. Moreover, think about how much capital you need to achieve your milestones and goals, and for how long it will last you. Lastly, compare the valuation and capital to other similar startups in your industry or region.

2 Ownership and Voting

The ownership and voting section of the term sheet defines how the equity of your startup is distributed among the founders, the investors, and the employees, as well as how decision-making power is allocated among the shareholders. Representation is usually in terms of percentage of shares or number of shares held by each party, while voting is typically determined by type of shares or voting agreements. When evaluating this section, you should take into account how much ownership and voting rights you are retaining as a founder or entrepreneur, how much you are giving to investors and their expectations/preferences, how much you are allocating to employees and how you are incentivizing/retaining them. Additionally, consider how voting rights are structured and what major decisions require shareholder approval.

3 Liquidation and Exit

The liquidation and exit section of the term sheet outlines what happens to the equity of your startup in the event of a liquidation or an exit, such as a merger, an acquisition, or an IPO. When evaluating this section, you should consider factors such as the liquidation preferences and participation rights of investors, the anti-dilution and conversion rights of investors, the drag-along and tag-along rights of investors and founders, as well as the vesting and acceleration clauses of founders and employees. These elements can all have an effect on your payout, return, equity, valuation, ownership and compensation.

4 Other Provisions

The other provisions section of the term sheet covers any additional terms and conditions that are relevant and important for the investment deal, such as confidentiality, exclusivity, no-shop, information rights, board representation, pro rata rights, redemption rights, pay-to-play provisions, and dispute resolution clauses. It is important to evaluate this section by considering how these provisions protect or limit your interests and rights as a founder or an entrepreneur, affect your relationship and communication with the investors and the board, align or conflict with your vision and strategy for your startup, and compare to industry standards and best practices.

5 Negotiation Tips

The negotiation tips section of the article provides some practical advice and guidance on how to approach and conduct the term sheet negotiation process with the investors. Negotiating effectively is a crucial and challenging part of fundraising, as it involves balancing both parties' interests and expectations while maintaining a positive rapport. To do this well, you should do your homework and research the investors, their portfolio, track record, reputation, and preferences. Additionally, be prepared and confident in presenting your startup, traction, market, differentiation, and projections. You must also be flexible and open-minded to explore different options and scenarios while being clear and firm on your priorities and goals. Respectful communication is key when speaking to investors; however, be assertive and persuasive while defending your position. Finally, seek feedback from mentors, peers, lawyers, or other experts to help you understand the term sheet provisions.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?