At SeedLegals we often get asked “When do I need to start creating my term sheet?” and “When should I send my term sheet over to an investor?”.
What is a term sheet?
A term sheet is the first document that will be exchanged once the investors have seen your pitch deck and they’re keen to discuss the terms around the investment. Our data shows that although non-legally binding, most of the negotiations are done during the term sheet stage
The term sheet summarizes the essential elements of the investment proposal in a non-legally binding document, starting with the proposed valuation of your startup and the amount you are looking to raise. This allows you to negotiate and align with investors on the fundamental aspects of the investment, with both founders and investors feeling more confident that the whole exercise will not ultimately be a waste of time, money and effort.
The term sheet sets out intentions in a clear and concise document, including financial, legal and administrative aspects. Having a short summary setting the fundamentals of the round, enables all parties to focus on the important matters without having to go through the surplus and somewhat exhausting details of the closing documents.
Once signed, the term sheet will seamlessly feed into the longer-form documents, your new Shareholders Agreement and Articles of Association and you’ll next receive the funds and close the round.
Who sends the term sheet?
In some cases, VC investors will send their own term sheet over to the founders. But it actually makes more sense for founders to put a term sheet on the table first whenever possible, taking the lead with prospective investors in their company. Such an approach has huge value, enabling founders to set benchmarks and key deal terms, from which negotiations will follow – and thus using the anchoring effect to their advantage.
So at SeedLegals, we’ve simplified the process to enable founders to create their own term sheet through a straight-forward process and based on industry standard terms for their stage of growth. Founders can then easily share their term sheet with prospect investors, maintaining the momentum and dramatically increasing their chances of securing investment.
When should I start preparing my term sheet?
Creating your term sheet on SeedLegals as a first time founder is a thorough education. And once you’re familiar with the nitty gritty legals of the investment proposal, you ultimately be able to have much higher level conversations with investors. SeedLegals helps you understand the concepts involved in early stage rounds (minus the legal jargon associated with traditional law firms), gives you confidence when discussing your round with investors and naturally gives investors more confidence in you as founder.
Leading on the term sheet and having the document to hand, ready to send over to investors will demonstrate that you know what you want, you understand the terms and you’re serious about the investment opportunity for the investors. With hundreds of startups looking for investment and knocking on the door of your potential investor, taking the initiative and sending them your term sheet will keep you at the forefront of their minds, and dramatically accelerate the process of decision-making.
Our data shows that securing a first signature on your term sheet will immediately increase your chances of getting follow on signatures and closing the round by up to 63%.
What to do if your investors send you a term sheet?
Despite what we’ve said above, if you happen to receive a term sheet from an investor and you’re happy to accept the terms – we can easily replicate what your investors’ term sheet says on SeedLegals. This will allow you to then send the same term sheet to multiple investors easily, and to use the follow on shareholders agreement and articles of association to close the round and get the money in the bank!