Start-up First Term Sheet: Stumbling Blocks to Avoid

Abstract

Start-up relationships with business angel and/or venture capital are similar to a marriage – but with a divorce in mind. The latter necessitates a proper prenuptial agreement signing at the very beginning of the relations. In case of business angel and/or venture capital we are speaking about Term sheet, determining pricing, powers and duties of the board, as well as information, participation and protective rights for the partners. Standard Term sheet consists of three buckets of provisions, defining: (i) terms impacting start-up valuation and economic division of profits and proceeds upon a liquidity event, (ii) terms impacting control over decision making and (iii) investor protection terms. This article focuses on financial and economic aspects of funding agreement, exposing some tricky parts of the Term sheet, threatening to transform potential win-win deals into rupture of relations, crash of the company or even legal battles. The results of the analysis are used to substantiate growing in popular appeal thesis that raising too much money can be detrimental for a startup.

Keywords

• start-up
• term sheet
• business angel
• venture capital
• convertible securities