You’ve poured your heart and soul (and maybe your savings account) into your startup for the last couple years.  You’ve endured countless discouraging comments and kept your dream alive.   You’ve begged and borrowed from family and friends for the money to move that dream forward.  If you’re smart, you probably contacted one of the regional technology incubators for free assistance on your business plan and strategy.  Whether on your own, with the assistance of regional support organizations, or just dumb luck, you’ve caught the eye of an individual or group who is interested in investing in your start-up.  Dollar signs are floating in front of your eyes as the realization of years of hard work is within your grasp.

Then comes the “term sheet”. 

Per Wikipedia, a term sheet:

A term sheet is a bullet-point document outlining the material terms and conditions of a business agreement. After a Term Sheet has been “executed”, it guides legal counsel in the preparation of a proposed “final agreement”. It then guides, but is not necessarily binding, as the signatories negotiate, usually with legal counsel, the final terms of their agreement.

The problem for many entrepreneurs is the language contained in the term sheet.  Prepared by legal on behalf of the potential investors, most entrepreneurs will find themselves at a disadvantage at this stage.  Hopefully, by the time you are at this stage you have a legal advisor on your team or advisory board that can help you navigate the term sheet.

This is an extremely important step in the development of your start-up, and decisions made in your funding rounds can have long-lasting impacts on your venture.   Educating yourself on the key concepts and terms found in the documents that will be put in front of you can go a long way to making decisions you can live with down the road.

Crib Sheet: The Term Sheet Glossary is an excellent, well-written article outlining the ten key terms the author (an attorney to multiple company founders) is most often requested to explain.  If you are confused on your pre-money versus post-money valuation, or what a liquidation multiple is, then this article is a good place to start.  Be sure to scan the comments, the author shares a basic capitilization template you might find interesting.

If you’re looking for more detailed explanation on term sheet lingo, then check out the Term Sheet Series Wrap Up page on Feld Thoughts, a blog written by an early stage investor who is also an entrepreneur.

NEOinc hopes you find these resources useful.  We wouldn’t suggest these articles could ever replace expert counsel, but understanding and preparation on your part is recommended, should you get to this point.