Demystifying Term Sheets - 2

From the Connecticut Venture Group Workshop on Term Sheets, held Jan. 24, 2008 in Stamford, CT. -- Term sheets are essential documents for investors in non-public companies. You'll begin to understand why as you read what they include. Here are some of the things that they delinate:

• Key players -- founders, issuers, purchasers, early investors
• Investment amounts
• Use of proceeds
• Price and capitalization -- valuation
• Closing date
• Form of investment -- usually preferred stock

In the next blog, we'll discuss valuation and other topics.

Please send questions or comments to this blog or to my email: upstartwyn@gmail.com.

Investor Term Sheets continued

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.

Understanding Term Sheets

Last month I attended a workshop run by lawyers on "Nuts and Bolts of Investment Term Sheets." The Connecticut Venture Group hosted the session, and Eric Dale of Robinson & Cole and Mark Kaduboski of Wiggin and Dana ran the workshp. These attorneys did a great job taking the audience of entrepreneurs and investors through the key sections of a term sheet. The biggest thing I learned is that it is essential to have a good attorney on your side, if you're going to sign one of these documents in the process of raising capital.

It's easy for the layman to miss key points that take rights away. Face it. Every entrepreneur wants to raise as much capital as she or he can, while giving away as little of the company as possible. The investors want to get as high a return as possible, and sometimes, they believe that requires taking a big chunk of ownership and rights away from the founders. You need a lawyer to help you. The investors certainly have lawyers.

In future posts, I'll go over the other points I picked up from this excellent workshop. Stay tuned.