Term Sheets and Closing

Trust Everyone ... but Cut the Cards Anyway

ALL INVESTMENTS BY angels (and everyone else) in a company are made according to detailed legal documents that specify everything about the relationship among the various parties, the terms of the value exchange, and the various rights and responsibilities of everyone involved. The paperwork can range from three to five pages for a simple, nonconvertible note, to 120 pages or more for a full convertible preferred stock round. Because these are legal documents, both parties—the company and the investor—have their own lawyers, who work together to develop the actual agreements signed by the principals.

The collection of documents that together constitute the investment agreement are typically summarized in a much shorter document (anywhere from one to half a dozen pages, depending on the type of investment) known as the term sheet. Think of the term sheet as a shorthand way of documenting an agreement in principle that will take many pages of legalese to implement. Because it deals specifically with all of the major points of the relationships, it allows both sides to determine quickly whether or not they want to enter into a deal in the first place.

A term sheet is usually (although not always) drafted by the investor and presented to the entrepreneur with a defined date by which it needs to be accepted. If the entrepreneur signs and returns it within that period, then the deal is in motion, and the lawyers for ...

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