StartUp Investing Terms: You Must Know

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| (0) Comments |Author :INFUBIZ

An innovative idea. ??
Ensuring robust project management ??
Recruiting an efficient team. ??
Planning the finances of the business ??
Prepping well for the investor meet-up. Unsure what to do exactly?

As a start-up founder or professional Investor, one of the key items you need to be cognizant of while prepping for meet-up is the term sheet. Many of you may not be aware of what a term sheet stands for. This is why we are here to help.

What is a Term Sheet?

A term sheet is a non-binding written document that outlines the offered terms and conditions under which an ‘Angel’ or a venture capitalist (VC) will make the investment to the start-up. Consider it to be a framework of guidelines for negotiating the potential investment between both parties.

A term sheet comes into play after a pitch meeting or a preliminary meeting. It is subject to modifications as and when needed. It acts as a template for preparing a more detailed and legally binding document thereafter. Hence, it is prepared before the final agreement is ready for a business deal. A term sheet covers two primary areas of information:

  • Investment economics: Items concerning funding and liquidation of the start-up.

  • Company control: Items concerning the start-up’s corporate governance.

Understanding the Investor Term Sheet

Let’s move one step ahead and take a peek into the terms and technicalities that constitute a term sheet.

The issuer of the term sheet:
The VC issues a term sheet most likely. In the case of a pool of investors, the company that coordinates the fund-raising activity issues it.

Offer of new securities:
Investors may choose between preferred and common shares. Preferred shares, as the name suggests, give them precedence over common shares.

Pre-money valuation:
This term refers to the start-up’s value before receiving funding.

Post-money valuation:
This term is the estimated value of the start-up after receiving the investment. Usually, the post-money valuation will become the pre-money valuation for the next round of investment.

The number of shares:
This term refers to the shares given to the investors. They provide investors with rights that are proportional to their investment. The number of shares lays the basis of the price per share.

Price per share:
The price per share determines the price investors are liable to pay for every ownership share in the start-up.

When a company makes a profit and distributes this amount to its shareholders, this payment is referred to as a dividend.

Council rights
The investor is empowered to nominate or choose candidates for a board of directors.

Anti-dilution rights
These rights shield preferred investors when a company's valuation is lower than their investment. Accordingly, preferred shareholders are protected by giving them additional shares.

Pro-rata rights
A pro-rata clause grants an investor the option to participate in future financing rounds to retain their percentage ownership in the company, which would otherwise be diluted.

Right of first refusal (ROFR) and approval of the sale
This clause requires that all current shareholders are notified and have the right to buy stock from an investor who is selling.

Conversion right:
This term refers to the ability to convert shares of preferred stock into shares of common stock. Investors who receive preferred stocks get conversion rights.

Liquidation preference:
When an investor holds a preferred stock, they have priority over common stock to receive the distribution of assets in the case of a liquidation of the company.

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