Pre-money valuation simply refers the value of the company before the financing round. Before we do though, it’s helpful to actually see what a few actually look like: In this section, we are going to break down the 7 common sections of a VC Term Sheet. So what does a VC Term Sheet actually look like? Share of Returns: How will proceeds be split between the investor(s) and the management?.Time to Achieve an Outcome: How long will it take to monetize their VC investment (i.e.Control Rights: Who has control of the company’s future?.Definition of Success: What does success look like in the future?.Valuation: What is the worth of the business today?.Lead to the next stage or repeat the start-up process with a new ventureĪs a result, the potential sources of conflict, which will be negotiated in a term sheet, include:.
Establish operational success for the company.
Maintain majority control of the company while sharing some risk with financial backers. Raise funds to operate the business with more flexibility. Prove the validity of the business idea. Return a high rate of return on their fund and leverage success to raise an additional fund. Obtain liquidity through eventual sale or IPO. Provide additional capital if the investment is progressing well. Govern the portfolio company’s financial and strategic decisions (i.e. Maximize the financial return of each investment while mitigating risk. The investor and entrepreneur have different objectives that will play out in any term sheet negotiation. While time to investment can vary from a few weeks to a few years, the venture capital timeline for an early-stage company has six discrete steps:ġ) Start-up Formation: formulation of the idea, core team hiring, intellectual property filings, MVPĢ) Investor Pitch: “roadshow” marketing of start-up, feedback on the idea, the start of diligenceģ) Investor Decision: the continuation of due-diligence, final investor pitch, venture partner decisionĤ) Term Sheet Negotiation: deal terms, valuation, cap table modelingĥ) Documentation: complete due-diligence, legal documentation, government filingsĦ) Sign, Close and Fund: fund, budget and build Setting the Stage Between Investor and Entrepreneur Potential for ownership dilution, less voting power takes time away from managing the business)Ĭontrol mechanisms (go or no-go decision) with options to double down or hedge risk, validation of the firm’s investment thesis Time-consuming process to raise funds (i.e. Increased valuation if the company performs well, more capital to implement new expansion plans, access to experienced value-add partners We have listed some of the most important considerations in the table below. Median Valuations by Stage ( Source: PitchBook) Pros / Cons of Fundraisingįrom the perspective of an entrepreneur and existing investors, there are several advantages and disadvantages of raising outside capital. In the last few years, however, there has been a noticeable move towards deals of larger magnitude.Īs you would expect, the average deal sizes are significantly larger for later-stage investments, but early-VC investments have been trending up across the board. Historically, deal counts tend to favor earlier stage investments as shown below. Guide to The VC Capitalization Table Funding RoundsĪ VC term sheet is created at each investment round, which is usually designated by a letter: Seed-Stage The VC term sheet will then flow into the VC capitalization table, which is essentially a numerical representation of the preferred investor ownership specified in the term sheet. The VC term sheet is a non-binding legal document that forms the basis of more enduring and legally binding documents, such as the Stock Purchase Agreement and Voting Agreement.Īlthough short-lived, the VC term sheet’s main purpose is to lay out the initial specifics of a VC investment such as the valuation, dollar amount raised, class of shares, investor rights and investor protection clauses. The term sheet is short, usually less than 10 pages, and is prepared by the investor. The VC Term Sheet establishes the specific conditions and agreements of venture investments between an early-stage company and venture firm. 5) Right of First Refusal / Co-Sale Agreement. 
Breaking Down Key Sections of the VC Term Sheet.Setting the Stage Between Investor and Entrepreneur.
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