Early-Stage Term Sheets

13 Pages Posted: 30 May 2017 Last revised: 10 Nov 2021

See all articles by Susan Chaplinsky

Susan Chaplinsky

University of Virginia - Darden School of Business

Abstract

This note was written as an updated version of "The Early-Stage Term Sheet" (UVA-F-1444) and may be used in its place.In seeking funding for an early-stage company, the entrepreneur and investor will confront choices about the amount, terms, and conditions of the financing. These terms are usually set forth in a term sheet that contains a host of provisions designed to protect the value of an investor's capital. These terms define the investor's rights as a holder of a senior security to common stock and are designed to secure the investor's ownership position, provide the right to monitor and control important company decisions, and facilitate exit from the investment. The note focuses on a few key aspects of these terms—antidilution, liquidation preference, dividends, control rights, and redemption—all of which are widely regarded by practitioners as having the greatest ability to affect the economic returns for the parties involved in an early-stage investment. Although not meant to be exhaustive, the examples offer a perspective on how a term can be worded in order to confer differential rights between the parties.

Excerpt

UVA-F-1730

Rev. Oct. 8, 2018

Early-Stage Term Sheets

In seeking funding for an early-stage company, the entrepreneur and investor will confront choices about not only the amount, but also the terms and conditions, of the financing. These terms are usually set forth in a term sheet that contains a host of provisions designed—in varying degrees—to protect the value of an investor's capital. These terms define the investor's rights as a holder of a senior security to common stock and are designed to secure the investor's ownership position, provide the right to monitor and control important company decisions, and facilitate exit from the investment. The note focuses on a few key aspects of these terms—antidilution (AD), liquidation preference, dividends, control rights, and redemption—all of which are widely regarded by practitioners as having the greatest ability to affect the economic returns for the parties involved in an early-stage investment.

Although in any given transaction a particular issue could arise that would require terms other than those covered here, most early-stage investments require a basic understanding of these terms because they cover rights relating to the preservation of capital and the size of the potential returns. These rights will be of concern to both entrepreneurs and investors in all early-stage deals. At the end of the discussion of each term, a chart highlights how these terms can be structured through the negotiating process to fall on a spectrum between investor-friendly terms and entrepreneur-friendly terms. Although not meant to be exhaustive, the examples offer a perspective on how a term can be worded in order to confer differential rights between the parties.

Types of Securities

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Keywords: private equity, venture capital, term sheets

Suggested Citation

Chaplinsky, Susan J., Early-Stage Term Sheets. Darden Case No. UVA-F-1730, Available at SSRN: https://ssrn.com/abstract=2974532 or http://dx.doi.org/10.2139/ssrn.2974532

Susan J. Chaplinsky (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4810 (Phone)
434-243-7676 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/chaplinsky.htm

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