The Business of Venture Capital, 3rd Edition

25Terms and Conditions Apply: The Art of Structuring Investment Transactions

“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,” writes Mark Suster of Upfront Ventures.

Term sheets are dense with legalese, filled with jargon designed to protect, but very hard to understand. Most of terms don't apply to a large number of transactions, but they are there because someone got screwed in one situation and that led to the addition of a new term. Before you know it, it has ballooned into a big hairy lump, hard to entangle. You hire attorneys to take this pain away, but if you do not understand the structural elements, it can come back and bite you.

Much has been written about term sheets, including line-by-line explanations and analysis, but it is akin to looking at minutiae — the trees — when the perspective of the forest is critical. The goal of this chapter is to simplify, prioritize, and focus on the forest — or the key terms that help complete a transaction. In the end, it's only a handful of terms that matter.

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 on the following underlying spirit of the term sheet:

• The investment opportunity and market conditions ...