The process of entering into a seed round with angel investors and entering into an A round with VCs is similar in some ways. Both rounds require a discussion of investment terms. Terms are just standard factors that you and the investor must consider and agree upon in the course of the investment.
They can be broken into three main categories: those that describe the amount and type of investment, those that describe the investors’ rights, and those that describe board representation, warranties, and other assorted agreements.
A term sheet lays out the terms of the agreement that investors and founders need to discuss. When the terms have been agreed upon, the term sheet is used to create a legally binding contract.
The terms of the deal are often more important than the price and valuation you put on your company. Terms can define control, including the ability of investors to fire the CEO if they want to. They can also control when and where your company is sold, so don’t take the terms lightly even if you get a great price for your company.
Start with a term sheet template rather than building one from scratch. Several commonly accepted templates are available, and the best ones are from the National Venture Capital Association (NVCA). You can find a great term sheet template; click on the Resources tab.
