Before you seek out and negotiate a venture capital deal for your business, it is well worth your time to really understand the terms of a venture capital offer. Having a background in private equity finance, I came across a lot of companies that didn’t have a firm grasp of venture capital terms or what comprised a term sheet prior to talks. Simply, the VC Term Sheet lays out the main terms of the VC offer. Terms are normally agreed to prior to drafting of the Operating Agreements. In this article I provide an example term sheet overview so you have an initial feeling of what it covers.
Offering: 100,000 shares of Convertible Preferred Stock, Series A Represents 45% of Company’s Voting Power.
Price per Share: $10/share; $1M in aggregate proceeds.
Preferred Stock Voting Terms: One vote for each Common Stock Share into which the preferred is convertible on all Company matters, with the following exceptions……
Liquidation Provision: $10/share preference over Common.
Conversion: Subject to Anti-Dilution Adjustments.
Anti-Dilution Terms: Weighted Average for subsequent issuances at a price below Conversion Price. Anti-Dilution protection for Stock Splits, Stock Dividends.
Dividend Payments: 10% accrued and payable quarterly, starting at year 2.
Redemption Procedure: Company may call Redemption at beginning of:
- Acquisition of Company
- IPO at excess of Redemption Price
- 3rd Anniversary of Issue, at the following pricing: Year 3 and prior- 110% of Conversion Price. Year 4- 108% of Conversion Price. Year 5- 104% of Conversion Price. Year 6- at Conversion Price.
Registration Rights:
- Demand Registration: Two, at Company’s expense, for Series A Preferred. Conditions: First Demand exercisable at earlier of Company IPO or 3rd Anniversary date of issue. Demand can’t be exercised prior to 12 months following IPO. Minimum Aggregate Proposed Offering Price of at least $3,500 per share Common Stock.
- Piggyback Registration: Conditions: Subject to cut-back at Underwriter’s Discretion. Company not required to offer opportunity to participate more than once, except for those whose holdings are at least 1% of the Company outstanding Common Stock, at time of registration.
Representations & Warranties: Standard
Financial Information & Inspection Rights:
- Unaudited Monthly & Quarterly statements
- Yearly Statements are Audited
- SEC Filings
- Stockholder Communications
- Business Plan Updates
- Visitation Rights (with notice)
- Inspect Properties
- Obtain Non-Proprietary Information on Company’s Affairs
Board Representation: Five Members elected by Class voting. Common holders elect 2, Preferred elects 3. After Preferred Conversion, all 5 Directors elected by Common Voting as a single class.
Pre-Emptive Rights: Right to purchase a portion of any subsequent issuance of Company Common Stock (or equivalents), founded on ownership percentage of the fully diluted Company Common Stock.
Before You Approach Venture Capital
Make sure you have a great Business Plan which contains a solid Marketing Plan and Strategic Plan. Also have a good Executive Summary and Investment Overview prepared, as well as, a Loan Package if applicable. You may want to consider hiring Business Planner to help you develop and package these important documents.
About The Author
Frank Goley works in the capacity as an experienced business consultant, business turnaround consultant, business plan expert, business plan writer, business coach, small business consultant, business planner, marketing consultant, online marketing consultant, seo consultant, and business plan consultant for ABC Business Consulting. Frank is considered an expert in writing, developing and implementing business plans, business turnaround plans, funding business plans, marketing plans, strategic plans and web marketing plans. Frank offers comprehensive business consulting, business coaching, business turnaround consulting, along with web seo, web development and web marketing consulting, to small and medium size companies. Frank is the author of a business plan book, The Comprehensive Business Plan Workbook – A Step by Step Guide to Effective Business Planning, and he has over 115 published articles and e-books on business success strategies. He also writes the Business Success Strategies Blog and publishes the Business Success Newsletter.
