Software Growth

Term sheet

A term sheet is a short, mostly non-binding document that sets out the main terms of an investment or acquisition before the full legal documents are drafted.

A term sheet outlines the key terms on which an investor will fund you, or a buyer will acquire you. It is usually a few pages and mostly non-binding. Once you sign, the parties spend weeks or months on due diligence and full legal documents, so the term sheet is where the economics are really set.

What is in a venture term sheet

In Venture Deals, Brad Feld and Jason Mendelson sort terms into economics and control. Economic terms include price, liquidation preference, vesting, the employee option pool and anti-dilution. Control terms include the board, protective provisions, drag-along rights and conversion.

  • Valuation and amount. Pre-money valuation plus the check determine the investor's percentage.
  • Option pool. Often expanded before the round, which falls on existing holders.
  • Board and veto rights. Who sits on the board and which decisions need investor approval.
  • No-shop. A binding clause that stops you from talking to other investors for a set period. Binding provisions such as this and confidentiality are the usual exceptions to the non-binding rule.

Worked example: a $1M investment at a $4M pre-money valuation means a $5M post-money, so the investor owns 1 / 5 = 20 percent. Whether the pool is inside the pre-money changes how much of that falls on you. See dilution.

Acquisition term sheets

A letter of intent (LOI) plays the same role when someone offers to buy your SaaS. It covers price, cash versus deferred payment, any earnout, your post-sale role, and an exclusivity period, after which the buyer runs due diligence.

Tips

  • Do not optimize only for valuation. Preferences, control and the option pool can matter more.
  • Get a lawyer who sees startup deals regularly before you sign, even though it is "non-binding".
  • Be careful with exclusivity. A buyer can use it to renegotiate after finding something in diligence.
  • Compare competing offers on all terms, using a model of what you would receive at several exit values.

This is general information, not legal advice.

Related terms

Sources

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