What You Need to Know About the Expansion Stage Term Sheet: Introduction
Unless you are professional fundraiser of venture capital (which most would rather not be), two words can seem both daunting and mystifying: term sheet.
You’ve built a great company: a product your customers love, revenue doubling year-over-year, a growing employee base, and a market position that most would envy. But you want more. You don’t want to be that nice little company that people find inspirational. You want to be the company that vendors are petrified to face and people would give their right arm to work for. It’s time to kick things up a notch now that you have made the decision to raise institutional capital.
You know a guy your wife went to high school with that is now a financial adviser and plays an investment banker on TV. He helps you put together a killer PowerPoint: hockey stick growth charts, a table showing the $10 billion market opportunity, and flow charts that would make a McKinsey consultant jealous. You set up meetings with a bunch of VCs. They all eat the story up but only two or three of them seem to have a clue what their talking about. You tell the others to bug off and when you finally sit down to your desk, there it is in your inbox: the term sheet.
Now none of this is rocket science, though laywers and bankers will be the first to tell you just the opposite. It comes down to a few key components that are critical to pay attention to. I thought I would write a little about each of these in an effort to provide some air cover before you head into battle.
Over the next few weeks, I will write about:
- Types of Securities and the Associated Bells-and-Whistles
- Provisions, Conversions, and Redemptions
- The Stock Purchase and Investor Rights Agreements
- The ROFR and Voting Agreement
The hope here is to take some of the mystery out of the term sheet and set you up for constructive and swift negotiations.