In this blog post, we’ll provide a comprehensive guide consisting of points to be discussed between founders, venture capitalists (VCs), & angel investors regarding relationships, duties and roles after investment.
Hence it is essential to know about the term sheet’s key considerations which are:
- Details of all Parties: Knowing about the involved parties is crucial. Therefore, a term sheet must clearly mention who the investor is and who are directors, promoters & founders are.
- Non-Binding effect: It is crucial to shed light on the extent to which the term sheet is binding to the parties. It must be clearly mentioned that the term sheet doesn’t intend to form any obligation on either of the parties.
- Liquidation Preference: This sheet must mention how the proceeds shall be divided among the promoter and investor in case liquidation happens.
- Board of Directors (BoD): This sheet must have the structure of the BoD, voting rights, quorum, etc. Investors must also be allowed to have affirmative voting rights in a few cases.
- Details of proposed transaction: This clause must focus on all basic details that the investment transaction must contain. It includes investment amount, shareholding structure, valuation of a company, along with anti-dilution provision.
- Share Transfer: If there is some kind of restriction on share transfer, it must be mentioned in the investment term sheet.
- Governance management & control: While the rules of investment are being set through the term sheet, one of the key points is regarding who shall be in control of the company. It should mention BoD, founder vesting, and information rights.
- Information Rights: These rights exist parallel with the Board’s rights. It must provide quarterly management reports with management or financial dashboard data. They must also provide detailed annual financials within a particular period after a fiscal year closes.
- Drag Along Clause: As per this clause, smaller investors lead larger investors in business decisions. It guarantees investors that minority stakeholders shall do as guided by the majority ones.
- No Shop Agreement: Investors would like to have protection from other investors or other investment rounds. It outlines the term that limits a company from taking investment money from other people for a particular period of time.
