What factors should you consider when evaluating term sheet options?

3 Liquidation preferences and anti-dilution clauses

A third factor to consider is the liquidation preferences and anti-dilution clauses that the investors are proposing or demanding. Liquidation preferences determine how the proceeds from a sale, merger, or dissolution of the company are distributed among the shareholders. Some investors may ask for a multiple liquidation preference, which means they get back more than their initial investment before anyone else gets paid. Anti-dilution clauses protect the investors from losing value in their shares if the company raises more funds at a lower valuation in the future. Some investors may ask for a full ratchet anti-dilution clause, which means they get to adjust their share price to the lowest price in any subsequent round.

4 Other terms and conditions

Finally, you should also consider other terms and conditions that may affect your relationship with the investors and your future fundraising options. For example, you should look at the vesting schedule, which determines how and when you and your team can access your shares. You should also check the drag-along and tag-along rights, which govern how you and the investors can sell your shares to a third party. Moreover, you should review the exclusivity and confidentiality clauses, which limit your ability to negotiate with other investors or disclose information about the deal.

Evaluating term sheet options is not a simple task, as you need to weigh the pros and cons of each offer and how they align with your vision, goals, and values. You should consult with your co-founders, advisors, lawyers, and accountants before making any final decisions. You should also remember that a term sheet is not a binding contract, and that the terms may change during the due diligence and closing stages of the deal.

5 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?