Venture Deals, 3rd Edition

CHAPTER 3 Overview of the Term Sheet

At the end of 2005, during the dark ages when venture capital was very much out of favor, we participated in a financing that was much more difficult than it needed to be. All of the participants were to blame, and ignorance of what really mattered in the negotiation kept things going much longer than was necessary. We talked about what to do and, at the risk of giving away super-top-secret venture capital magic tricks, decided to write a blog series on Brad’s blog (Feld Thoughts—www.feld.com) that deconstructed a venture capital term sheet and explained each section.

That blog series was the inspiration for this book. The next few chapters cover the most frequently discussed terms in a venture capital term sheet. Many venture capitalists (VCs) love to negotiate hard on every term as though the health of their children depended on them getting the terms just right. Sometimes this is inexperience on the part of the VC; often, it’s just a negotiating tactic.

The specific language that we refer to is from actual term sheets. In addition to describing and explaining the specific terms, we give you examples of what to focus on and implications from the perspectives of the company, VCs, and entrepreneurs.

The Entrepreneur’s Perspective

The term sheet is critical. What’s in it usually determines the final deal structure. Don’t think of it as a letter of intent. Think of it as a blueprint for your future relationship with your investor.