The Business of Venture Capital: Insights from Leading Practitioners on the Art of Raising a Fund, Deal Structuring, Value Creation, and Exit Strategies, 2nd Edition

CHAPTER 19 Structuring Investment Transactions

“For many entrepreneurs, reading a term sheet is no more interesting than reading the latest volume of the Federal Register. And most lawyers will tell you what the terms mean but not how they can be used to screw you, how to negotiate them, and what is the ‘norm.’”

—Mark Suster, entrepreneur turned venture capitalist (VC)¹

Much has been written about term sheets, including line-by-line analysis of terms. A line-by-line analysis is helpful, but it is akin to looking at trees when the perspective of the big picture or the forest is critical. Term sheets are dense with legalese. The goal of this chapter is to simplify, prioritize, and focus on the key terms that help complete a transaction.

Investment structure is the framework that describes the flow of capital from the investor to the company and back.

THE SPIRIT OF THE TERM SHEET

After due diligence, investors propose a set of investment terms that define the transaction. At the heart of it, both the entrepreneurs and investors agree upon the following underlying spirit of the term sheet:

• The investment opportunity and market conditions are ripe for rapid growth.
• Both parties bring a unique set of elements—technology and capital—to create value.
• Together, these elements can help catalyze and create value faster.
• Both parties agree to collaborate for a meaningful period of time, ideally until exit do us part.
• Both parties understand that financial success is critical for both ...