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Term Sheets and Term Types

2 min read

Sep 27, 2022 9:51:33 AM | Admin

For an investment contract to be drawn up, it’s best to start by completing a simple framework directly between the investment party and entrepreneur, before any legal teams get involved. If these components are not agreed to beforehand, then expect problems to arise during the closing process.

Date of Offer

  • ISSUER (Investor Name/ Organization name), Investment Amount, and Post Closing Ownership PERCENT
  • List of ALL parties involved, unallocated and allocated option pools too.
  • Max investment from other sources and acceptable investment source types (if round remains open)

Investment Structure (Traditional equity, SAFE, Convertible Note)

  • If Convertible Note, Interest rate, maturity date, capped price, discount for next round, conversion (upon future funding or change of control or repayment)
  • If SAFE, Promise for future equity or payout upon sale or liquidation

Timing to Close Investment

  • When the funding round may not accept any other investors

Use of Proceeds

  • How the allotted funds may be used within the company spends

Capitalization

  • Security Acquired (preferred or common shares, investment round)

Valuation

  • At what price is the company worth.

Prior Debt or Liquidation Preferences

  • Subordination or postponement of loan payouts

Security

  • Filing a GSA (General Security Agreement)
  • IP Control

Board & Advisory Seat

  • Will this investor have/ not have a seat.

Dividends

  • Payout structure and calculation, preferences, approvals

Conversion

  • At holders option, future investment rounds, or at time of an IPO

Voting Rights

  • Carve outs where Board Majority does not control decision

Additional Rights

  • Right of first refusal to Company followed by investor for co-sale rights, pre-emptive rights, standard information rights, standard registration rights, etc.

Reps and Warranties

  • Statements of fact that a seller makes as part of trying to persuade a buyer to purchase their business.

Legal Fees

  • Payment for the investment terms

Closing Conditions

  • Could include human capital expense controls, promotions, major investment approvals.
  • Information expectations (quarterly reports, budget approved by board, metrics)

Expiration of Terms

  • Between the two parties