A "venture capital term sheet" is typically a proposed summary of terms by which a prospective venture capital investor proposes to invest in a company. It is an indication of interest by the venture capitalist of the type of deal it is willing to do in order to invest in the company. Key provisions in venture capital term sheets include:
- The amount to be invested
- The type of investment— equity, debt or combination thereof
- The security to be issued to the investor (typically preferred stock)
- The valuation of the company before the new investment comes in (typically referred to as the "pre-money valuation")
- The option plan to be set aside for officers, employees and directors
- Redemption rights, if any
- Anti-dilution protection from future rounds of financing
- Makeup of the Board of Directors
- Employment and founder arrangements
- Non-solicitation and no-shop provisions while the investor is finishing due diligence and lawyers are drafting documents (granting the the investor exclusive negotiating rights)
- Dividend rights
- Registration rights (rights to require the company to go public or otherwise allow the investor to publicly register its shares)
- Pre-emptive rights on future stock offerings
After the venture capital term sheet is issued, the venture capitalist typically completes its due diligence investigation of the company and begins to prepare the definitive legal documents. These documents usually include a stock purchase agreement, an investors' rights agreement, a voting agreement, and an amendment to the company's certificate of incorporation setting forth the rights, preferences and privileges or the investor's stock in the company. Sample venture capital term sheets can be found at www.LegalAgreements.com.
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