A founders term sheet is a non-binding agreement which sets out the terms of a proposed deal. It usually occurs when a startup plans on raising capital from an investor(s) so both parties need to set out their terms. A founders sheet is typically followed by a subscription agreement which ensures the terms are enforceable against both parties.
This is a key document for any founder as it can outline how the company will be controlled.
What you need to consider
There are some things you need to consider before you review your founders sheet. Having a clear idea of how much you need to raise for your next goal is a good place to start. Consider as well, devising a long term strategy on how your startup will be funded. This is because all future raises will dilute your shareholding and effect how your business functions.
Additionally, it is wise to look for an investor who brings something to the table beyond money. For example some investors bring connections, business knowledge and industry experience that can help establish and grow your business.
What are the key terms?
Term sheets can vary depending on what type of funding round you are in. During the seed round, the investor will typically be the one providing the term sheet. As a founder keeping control over and retaining as much equity in your company should be the goal. That is why it is important to understand and know the specifications of your term sheet.
These are some key terms you need to keep in mind when reviewing your founders term sheet.
Investment and valuation
As a start up you need to set out clearly how much money an investor can put into your company. A term sheet will usually state the minimum and limit that someone can invest in your company.
Also within a term sheet there needs to be a pre-money valuation of your start up. This valuation will usually dictate the size of an investors investment so they. Also it will serve as an indication of how much money your startup is worth before funding.
What happens during liquidation
Your term sheet should outline the process if your start up goes into liquidation. This term would outline what happens to all the classes of shareholders. Typically as well, preference shares will have liquidation rights attached.This means preference shareholders will have the right to their investment back during liquidation.
If you plan on setting up an employee share plan you need to include this in your term sheet. This is because it will affect the pre money valuation of your company.
Deciding whether an investor will sit on the board of your company or what degree of board control he/she would have is vital. This is something your term sheet will address and a decision you need to make as a founder.
Non disclosure requirements
A non-disclosure agreement is something every startup founder should employ. This is because a non disclosure agreement actively protects your businesses sensitive information and trade secrets.
Non disclosure requirements are common in most legal documents of this nature. This is an effective way to ensure your business dealings remain between you and the investor.
Rights to future investment
Outline your right to raise further funds in the future is something which will need to be addressed in your term sheet.
A founders term sheet is something every founder will become familiar with.
To sum up
- A founders term sheet is a non-binding agreement which sets out the terms of a proposed deal.
- During the seed round, the investor will typically be the one providing the term sheet
- It is important to understand and agree on the terms within your term sheet
- A term sheet is not legally binding until you have reached a subscription agreement
If you have received a founders term sheet and you need help reviewing it, please get in touch with our start-up lawyers or call 1300 377 997.