What is a venture capital termsheet?


Fine Print: Founders Should Understand Terms Used in VC Deal Sheets

What is a venture capital termsheet?

A term sheet is a document that summarizes the main terms of an investment.

Although the majority of terms are non-binding, it is a crucial document that determines how a transaction is structured between an investor and a company. It is used by lawyers as a template for drafting more detailed investment agreements down the line.

“Term Sheets are crucial documents that determine how an investment will be structured between an investor and the management team, and serve as a template for the investment agreements to be drafted,” says Jonathan Hollis, managing partner of Mountside Ventures, who produced a guide to term sheets for founders.

A termsheet consists of 4 pillars

#1 – Valuation

Including key investment terms and types of shares included in the investment

#2 – Terms of Agreement

Including due diligence requirements, IC approvals and expected stock options.

#3 – Control

Including founder buy-in, minority protections and investor consents.

#4 – Binding terms

Including period of exclusivity, confidentiality and associated fees

>See also: Everything you need to know about valuing your business

Common Stock vs. Preferred Stock

Common stock is the most common form of stock and does not carry any special or preferred rights. They pay in proportion to the equity they hold. Preferred shares provide shareholders with certain rights that are not shared by common shares, usually upon the sale of the business. They are used to provide investors with additional protections.

According to Mountside Ventures, 80% of venture capitalists are asking for preferred stock, with a minority asking for common stock.

For VCT and UK EIS investors, the percentage of preferred shares requested drops to 60%. Forty percent of UK EIS and VCT investors opted for common stock. This is due to constraints imposed by HMRC on the type of preferred shares allowed to them.

The split between common and preferred stock is consistent across the stages, although common stock has become less common the higher the funding cycle – i.e. Series C, Series D.

>See also: 6 things you need to know when raising Series A funds

How long does it take to complete a venture capital deal?

The majority of funds take between 8 and 12 weeks to complete their due diligence and draft the investment agreements.

However, the fastest venture capital fund deals can close in as little as two or three weeks.

Mountside Ventures, a consultancy specializing in fundraising and exits, surveyed more than 200 European investors for its Demystifying venture capital termsheets report with over £11 billion under management.

Further reading

Series A to Series D, all you need to know about financing rounds


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