A key milestone in the lifecycle of many successful companies (and, admittedly, many unsuccessful companies) is obtaining financing from angel or venture capital investors, but in negotiating with experienced investors entrepreneurs are usually at a distinct disadvantage because they are unfamiliar with standard terms. While we strongly suggest entrepreneurs consult their lawyers rather than negotiate a term sheet mono-a-mono, we know this often doesn’t happen. Our goal in this series of posts is to give our readers the ability to better evaluate these documents themselves by introducing them to the standard terms in an early stage equity financing.
Although the specific language in early-stage financing documents can vary considerably depending on, among other things, the investor (angel, VC or someone else) and the company’s stage of development, the universe of possible terms is actually fairly well established. It is therefore possible, with an understanding of these basic terms, to form your own conclusions about a term sheet. For these posts we will use the model Term Sheet available from the National Venture Capital Association (NVCA) website as our guide because it covers most of the terms you would expect to see in a term sheet for an early stage equity financing (for a discussion of convertible debt, see this post), and it also includes some helpful annotations. We encourage you to download the NVCA Term Sheet here and follow along as we go through each section.
As an aside, there has been a lot of chatter recently about the sample early-stage financing documents put out by Fenwick & West, TechStars (by Cooley), Y Combinator (by Wilson Sonsini) and the Founders Institute (also by Wilson Sonsini). We do not want to rehash the pros and cons of form documents or go into the specifics of these four sets of models (for that we recommend you read the analysis already put out by Yokum Taku of Wilson Sonsini and Ryan Roberts, aka The Startup Lawyer, who together have said all we would care to say on those topics).