How To Craft A Term Sheet?

Question: A partner and I have presented a business opportunity to a private investor. After significant due diligence on both sides, and agreement in principle of terms, the investor has requested for us to present a term sheet. Where do I go from here?

Our Take:  It’s somewhat irregular for the company to issue the term sheet to the investors – usually, it’s the other way around.  That being said, it’s always an advantage to be drafting (called “controlling the paper”).

You are going to need 2 things to get this done properly:

1.  Good lawyers; and

2.  Knowledge of the basic terms.

Regarding the lawyers: you can’t do this yourself.  You need / should / must get competant legal counsel on your side.  Whatever deal you cut, you will have to live with it “forever.”  We can’t stress this enough.  Make sure whomever you get has experience in these types of deals. 

For your own education, Brad and I did an entire series on Term Sheets a while ago and these posts represent just about everything we know and the tricks that some investors try to get by some companies.  Start chronologically, from oldest to newest and we’ll take you through every major provision of a term sheet.

That being said, get a lawyer. 

  • Good, simple straight forward advice here. Thanks, Jason. Get a lawyer. understand the basic terms.
    In my prior lives as an engtrepreneur, I have pitched and raised money a couple or three times. A relatively small sampling. After 18 months at CTEK I have seen 80 or 90 pre-revenue companies pitching to angels.
    No question. When pitching for angels/individual early stage money, get a lawyer and TAKE THE TERM SHEET TO THEM.
    I agree with Jason that this tends to change at the sophisticated, especially VC, level of investor. But for those of you looking for pre-VC money…
    Most angels aren’t professional investors but see a lot of deals. And they want it made easy. They want YOU to tell them the size of the market you’re after. They want YOU to tell them how much money you need. They want YOU to tell them your valuation. Obviously they have the right (and routinely excercise it) to believe your or not. But they want you to make the first stab. So, take charge and do it.
    Too many startups take the attitude that “we think we need 200K and we’re open to negotiate our valuation”. Find a lawyer. Find some some advisors or a mentor. They’ll help you come up with a first stab at all of these and it allows you to be better preparted and you will attract more interest from potential investors by taking a stand.
    My 1.5 cents worth.

  • Also, go download the NVCA sample docs. You’ll find a term sheet in there, if you’re looking for a place to start (with or w/out a lawyer).