As a founder on a fundraising journey, you are on the hunt for a Term Sheet. For new founders especially, though, Term Sheets can be opaque and mysterious things. These exercises are designed to help you get more familiar with them – they are fictitious scenarios, but invite you to think about different terms and how you would react to being offered them yourselves. Remember – it is always worth getting advice from an expert when you are offered a Term Sheet.
Exercise 1 - seed stage
Scenario
- VYou are BASIL, a university spin-out.
- VYou have two products currently in beta form: Denning & Ziggurat
- VYou must raise a minimum of 300k to reach your next milestones.
- VYou have two potential leads, with two term sheets to decide between.
- VYou must assess the merits of each term sheet for your company - what can you accept and what should you negotiate?
The Term Sheets
- Do you accept the valuation? Why or why not?
- Which financial offer do you prefer? List your reasons.
- Analyse the governance and related conditions so that you can record:
- The terms you accept.
- The terms for which you propose alternatives. To facilitate negotiation with the investors, prepare reasons for your substitutions.
- What is your best alternative to no agreement?
- How long until you are out of cash (1) now and (2) later, assuming you accept one or other investment on the table?
Exercise 2 - Series A
Scenario
- VYou are Leptis Robotics, a startup looking to raise its Series A
- VYou have two potential leads, with two term sheets to decide between.
- VYou must assess the merits of each term sheet for your company - what can you accept and what should you negotiate?
Vexillum Ventures Offer
- 5 million EUR
- Series A Convertible Preferential Shares
- 2x liquidation preference
- 2 EUR per share, pre-money valuation of 14.1 million EUR
- Founders 60%, ESOP 15%
- Anti-dilution = full ratchet
- Board seat and consents
Fortitude Fund Offer
- 5 million EUR
- Series A Participating Preferential Shares
- 3x liquidation preference
- 2.5 EUR per share, pre-money valuation of 17.5 million EUR
- Founders 67.78%, ESOP 10%
- Anti-dilution = broad-based
- Governance and control terms
The Term Sheets
- Summarise the pros and cons of each fund’s offer – you can find the full documents under the icons below.
- Look at both the economic and control terms.
- Consider your recommendations – do you accept/reject/negotiate/or offer alternatives?
Comments on the Term Sheets
Below are worked examples of the exit valuations showing the returns that the investor will get based on their liquidation preferences, along with summary comments on each term sheet, written by David Gill. You can compare them with your own thoughts. Try not to look until you have made your own assessment.
Vexillum Ventures
Fortitude Fund
Terms like preferential shares, liquidation preferences, anti-dilution instruments can seem quite abstract at the time of receiving a Term Sheet, but they make a significant impact when it comes to an exit. You can use the spreadsheet linked here to model the impact of these terms in the long-run. Download a copy, put your own numbers into it, and test the scenarios.
Useful Examples
For a real world example AirTree Ventures have published their standard Seed stage Term Sheet template and YCombinator have done so for Series A.
HSBC Innovation Banking also produce a yearly report on Term Sheets used across the UK in the previous year, which you can use to help you understand the state of the market.