Fundraising can be a faster way to get money for a business project, particularly in start-ups. To make it successful, the start-up founders need to have a good term sheet for fundraising. Before deciding to contribute to the project or not, the fund owners will first see and analyze the term sheet. Therefore, making the right term sheet is the first thing of what to know when fundraising.
The document lays contains the terms of investment and collateral, what the projects are giving and trying to reach, what the fund owners get in return, and the guidelines on how the business founders and fund owners act to protect the investment. As a result, preparing the term sheet for fundraising can be a nightmare for start-up founders.
Preparing Sound Term Sheet for Fundraising
The term sheet is one of key factors for successful fundraising. Therefore, make sure to pay attention to the following things when preparing the document:
Using Third-Party Funding Portal
Most start-ups prefer to use third-party funding portal, thanks to the simpler process. Actually, there are many types of term sheet, depending upon the type of funding round. Fundraising rounds for start-ups are usually much simpler, lighter, and shorter, since the stake is less. In some cases, if there are only few investors, the term sheet may be provided by the investors.
What To Include
As the name suggests, the term sheet details every important thing related to the relationship between the investors and the business. The most common items included in the term sheet are the following:
- Profile of the company that is issuing the note
- The valuation
- Shares and prices
- Amount of fund being offered
- Board seats
- Voting rights
- Rights of investors to information
- What happens in case of IPO or liquidation
- Payment of legal expenses
- Rights to future investment
- Options of conversion
- And many more
Length of the term sheet may vary from a single page to 10 pages. The simpler the better. However, the business founders need to make sure that the details are enough.
What The Investors Look for
The investors review the tem sheet before making a decision. In general, they look out for some aspects, despite variation among persons. Here are the common things they see:
- Financial condition of the business, including debt and conditions that can put your business into bankruptcy
- Chance to get large controlling stake. If they are let uncontrolled, they may suggest replacing you
- Conditions that can limit the next fundraising rounds
- Short-term, high returns. Some investors simply look for hot exit while not having realistic expectations and sound timeline
Of course, the investors will try to look for things that benefit them more. If this happens to you, do not react harshly. Instead, hang in and patient, and then take strategic steps to protect your business from collapse due to unrealistic expectations.
In conclusion, good term sheets will protect both the business founders and the investors. Therefore, make sure to include every crucial detail in the document. This will help you in case of lawsuit in the future.