Funded

Chapter 10. The Anatomy of a Term Sheet

At this point you have built an investor pipeline and are setting up your first pitch meetings. But before you can close the deal, we need to cover the term sheet.

When you are raising a round, the term sheet is the agreement that you hope to receive coming out of a meeting. It is a short, nonbinding document in which investors propose the investment and ownership conditions under which they would invest in a startup.

Generally (depending on your prior relationship), you will not receive a term sheet after your first interaction with an investor. It can take multiple meetings to build a rapport. That said, your ultimate goal when raising a round is to receive multiple term sheets, so that you can select and sign the most favorable one. Once you’ve reached an agreement and have a signed term sheet with a lead investor, you then fill the round with other investors.

Often when you are raising convertible notes or SAFEs, there is no term sheet phase. Term sheets are much more common in priced rounds. When raising a simple convertible note, you, the entrepreneur, can provide the first draft of the final agreement following your initial pitch meeting. The paperwork behind convertible notes or SAFEs is generally much simpler than that behind a priced round, requiring minimal negotiation around discount, cap, and interest rate and leaving most negotiation of other terms to the next round of financing.

Understanding the Term Sheet

You can prepare ...