Why are term sheets necessary? They provide a written summary of the principal business and set down the economic terms of an equity investment in a non-public company. Typically, the investors do not have control over the company in which they invest, so they need the term sheets to protect their minority rights. In other words, the term sheet puts into writing a clear path to liquidity for the investor. Creating the term sheet enables both parties to think things through. What's the downside protection for the investor? Who has a seat at the table? How much of the company do early investors and founders get? What is the valuation? What's going to happen as more money is raised? How much dilution will there be?
All these questions need answering. Stay tuned for more in the blogs ahead.