Term Sheet: Read this before seeking funding! 13 Terms that every founders should know

When investors invest in a company there are multiple aspects involved related to stakes, voting rights, liquidation which startups should pay attention on before accepting the investment. These terms and conditions are included in a term sheet. A founder should read the terms and conditions should carefully that are outlined in the term sheet.  Let’s understand the terms.  Term Sheet: A term sheet is a nonbinding agreement outlining the basic terms and conditions under which an investment will be made.  What’s Included in a Term Sheet Startups seeking funding are usually at the mercy of VCs who want to maximize their investment return. This can result in the investor asking for and obtaining a disproportionate influence on the company’s direction.The term sheet should state how long the investor is required to remain vested.

1	Nonbinding Terms	Neither party is legally obligated to abide by whatever is outlined on the term sheet
2	Company valuations, investment amounts, the percentage of stakes	Company valuations, investment amounts, the percentage of stakes, and anti-dilutive provisions should be spelled out clearly.
3	Voting rights	Startups seeking funding are usually at the mercy of VCs who want to maximize their investment return. This can result in the investor asking for and obtaining a disproportionate influence on the company’s direction.
4	Liquidation preference	The term sheet should state how the proceeds of a sale will be distributed between the entrepreneur and the investors
5	Investor commitment	The term sheet should state how long the investor is required to remain vested.
6	Board seats	This refers to the number of Board Seats that the Investor will have on the Company’s Board of Directors.
7	Anti-dilution provisions	In the event that the business issues more shares in the future, these clauses safeguard the investor’s equity ownership.
8	Pre-money valuation	This represents the company’s value prior to an investment being made.
9	Post-money valuation	The post-investment worth of the company is determined by multiplying the pre-money valuation by the amount of the investment.
10	Investment amount	Investment amount is how much the investor is willing to put into the business.
11	Equity ownership	This is the share/percentage of the business that the investor will get in return for their investment.
12	Conversion rights	The ability to convert preferred stock into common stock at a later time is provided by conversion rights.
13	Drag-along rights	If an investor wants to sell their shares, they have the right to demand that the company’s founders and other shareholders do the same.

Term sheet template

Term sheet template for seed funding by University of Pennsylvania Law School’s Entrepreneurship Legal Clinic Term sheet template for Series A funding by Y Combinator

Cap Table

Founders may also come across a very common terminology while seeking investment is Capitalization (“CAP”) Tables. A CAP table, typically created using Excel, displays the current and proposed ownership of a company. It is a very useful tool for startups to keep track of the different securities they have issued (convertible notes, common shares, preferred shares, etc.) throughout their different financing rounds (seed, series A, series B, etc.). A company starting out may be quite simple, with only a few founders and maybe a small option pool of shares for future employees. When seed financing is acquired, the table must expand for a new investor and a new type of equity (see example below). Whenever new investors are acquired, the previous investors’ and founders’ ownership interests will likely be diluted (decreased). A CAP table can be a useful forecasting tool if you can estimate how much you will need to raise in the subsequent few rounds of financing. You will be able to see what valuation at each round you will need to achieve to retain a certain ownership of your company