The Art of the Term Sheet

One of the first famous venture capital investments was Digital Equipment Corporation (DEC). In 1957 American Research and Development Corporation (AR&D), one of the first venture capital firms, invested $70,000 in DEC. When DEC went public in 1968, this investment was worth over $355 million, or a return of over 5,000 times the invested capital. AR&D's investment in DEC was one of the original venture capital home runs.

In 1957 the venture capital industry was just being created. At the time, the investor community in the United States was uninterested in investing in computer companies, as the last wave of computer-related startups had performed poorly and even large companies were having difficulty making money in the computer business. We can envision the frustration of DEC's co-founders, Ken Olson and Harlan Anderson, as the investors they talked to rejected them and their fledgling idea for a business. We can also imagine their joy when Georges Doriot, the founder of American Research and Development Corporation, offered to fund them. After a number of conversations and meetings, Doriot sent Olson and Anderson a letter expressing his interest in investing, along with his proposed terms. Today, this document is called the term sheet.

Now, imagine what that term sheet looked like. There are three different possibilities. The first is that it was a typed one-page letter that said, “We would like to invest $70,000 in your company and buy ...

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