You have successfully navigated negotiations with your venture capital firm. Congratulations!
But what happens next? After all the terms have been negotiated, the venture capital firm will draw up a term sheet that summarizes all the important items, as well as the proposed structure of the deal.
A term sheet is simply a summary, and all summarized items will be expanded upon later in the closing documents. While the term sheet is non-binding, it is still used as a document to set forth expectations of both parties until the actual closing.
Included in a term sheet you may find:
o The total invested dollars provided by the venture capital investors
This may be a single dollar amount, or broken down into separate disbursement amounts at agreed times in the future.
o The target date for closing the venture deal
The closing for venture capital doesn’t happen overnight. Due diligence is still required. Usually the closing is set on an average of 60 days from the date of the term sheet.
o The division of capitalization of the company
This is where you will see who will own what part of the company after the closing occurs. For instance, a venture capital deal might require that they own 55 percent of the company, and the founders will retain a 45 percent ownership stake.
o The type of security the venture capital firm will eventually own
If the goal is an IPO, the venture capital firm will clarify up front whether they desire to own preferred stock, common stock, or perhaps convertible debentures.
o The number of shares
In addition to the type of stock, the venture capital firm will outline how many shares it requires to purchase up front at the IPO.
o Dividend distribution
The term sheet may also set forth how future dividends are to be paid to the venture capital firm as stockholders.
o Distribution of sale proceeds
If the company is sold prior to an IPO, the term sheet also will explain how final sale proceeds will be distributed to both founders and venture capital investors.
Though the term sheet is not a binding document, it is created as a reminder of the terms agreed up on in negotiations. With the term sheet, all parties have a clear understanding, and there are no disagreements up to closing time.