{"id":18555,"date":"2020-08-24T07:00:09","date_gmt":"2020-08-24T14:00:09","guid":{"rendered":"https:\/\/foundersnetwork.com\/?p=18555"},"modified":"2020-08-26T10:40:31","modified_gmt":"2020-08-26T17:40:31","slug":"term-sheets-101-for-early-stage-founders","status":"publish","type":"post","link":"https:\/\/foundersnetwork.com\/term-sheets-101-for-early-stage-founders\/","title":{"rendered":"Term Sheets 101 for Early-Stage Founders"},"content":{"rendered":"<h3><span style=\"font-weight: 400;\">Don\u2019t let term sheets trip you up. <a href=\"https:\/\/www.linkedin.com\/company\/dentons\/\">Dentons<\/a> associate <a href=\"https:\/\/www.linkedin.com\/in\/joe-collingwood-a752aa44\/\">Joe Collingwood<\/a> and <a href=\"http:\/\/www.aura.tours\/\">Aura<\/a> founder <a href=\"https:\/\/www.linkedin.com\/in\/ataerarguder?lipi=urn%3Ali%3Apage%3Ad_flagship3_profile_view_base_contact_details%3BRwGBTaIJTb2RnybcFpipCA%3D%3D\">Ataer Arguder <\/a>explain term sheet basics for the early stage founder, and break down how to think strategically about yours.\u00a0 <\/span><\/h3>\n<p><span style=\"font-weight: 400;\">For early-stage founders, the term sheet is among the most consequential documents you\u2019ll develop. Your term sheet &#8212; basically a written agreement dictating the terms and conditions of a deal &#8212; serves a critical role in the fundraising process, and can carry implications for your startup\u2019s ownership structure in the long term. But managing term sheets doesn\u2019t need to be a scary process.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cFor somebody going through the fundraising process for the first time, there can be a lot of jargon and unfam<\/span><span style=\"font-weight: 400;\">iliar terms in those term sheets,\u201d says Joe Collingwood, associate in Dentons\u2019 corporate practice. Along with <\/span><a href=\"https:\/\/www.linkedin.com\/in\/ataerarguder\/\"><span style=\"font-weight: 400;\">Ataer Arguder<\/span><\/a><span style=\"font-weight: 400;\">, Founder of <\/span><a href=\"http:\/\/www.aura.tours\/\"><span style=\"font-weight: 400;\">Aura<\/span><\/a><span style=\"font-weight: 400;\"> and head of Founders Network London chapter, Collingwood breaks <\/span><span style=\"font-weight: 400;\">down the fundamentals of term sheets and ways to think strategically about crafting yours. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you\u2019re an early stage founder, register for the full <a href=\"http:\/\/foundersnetwork.com\/function\/term-sheets-101-for-early-stage-founders\/\">Term Sheets 101 seminar<\/a> and check if you <a href=\"https:\/\/foundersnetwork.com\/request\/\">qualify for membership<\/a> to <a href=\"https:\/\/foundersnetwork.com\/\">Founders Network<\/a> and <\/span><span style=\"font-weight: 400;\">learn term sheet essentials, including:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Understanding VCs<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Setting a Valuation<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Liquidation Preferences<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Founder Vesting\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Anti-Dilution Clauses + More<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">\u201cA term sheet is basically a letter of intent: summary of mutual understanding of what&#8217;s going to happen when,\u201d says Arguder. \u201cFounders don&#8217;t really know how this works from the VC\u2019s side, what the fund needs to do to make money &#8212; the dynamics, the math. Once a founder understands how this works, I think it&#8217;s easy to reverse-engineer the process and become VC ready.\u201d\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Founders, particularly, first-time founders, are likely to encounter a bunch of terminology that they may not fully comprehend: Liquidation preferences, founder vesting, anti-dilution clauses, straight line vesting, preemption rights, just to name a few.\u00a0<\/span><\/p>\n<span class='bctt-click-to-tweet'><span class='bctt-ctt-text'><a href='https:\/\/x.com\/intent\/tweet?url=https%3A%2F%2Ffoundersnetwork.com%2F%3Fp%3D18555&#038;text=%E2%80%9CBoth%20sides%20need%20to%20be%20very%20careful%2C%20because%20this%20round%E2%80%99s%20term%20sheet%20is%20the%20next%20round%E2%80%99s%20starting%20point.%20Valuation%20is%20critical.%E2%80%9D%20-%20%40ataerarguder&#038;via=foundersnetwork&#038;related=foundersnetwork' target='_blank'rel=\"noopener noreferrer\">\u201cBoth sides need to be very careful, because this round\u2019s term sheet is the next round\u2019s starting point. Valuation is critical.\u201d - @ataerarguder <\/a><\/span><a href='https:\/\/x.com\/intent\/tweet?url=https%3A%2F%2Ffoundersnetwork.com%2F%3Fp%3D18555&#038;text=%E2%80%9CBoth%20sides%20need%20to%20be%20very%20careful%2C%20because%20this%20round%E2%80%99s%20term%20sheet%20is%20the%20next%20round%E2%80%99s%20starting%20point.%20Valuation%20is%20critical.%E2%80%9D%20-%20%40ataerarguder&#038;via=foundersnetwork&#038;related=foundersnetwork' target='_blank' class='bctt-ctt-btn'rel=\"noopener noreferrer\">Share on X<\/a><\/span>\n<p><span style=\"font-weight: 400;\"><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-18576 alignleft\" src=\"https:\/\/foundersnetwork.com\/wp-content\/uploads\/2020\/08\/Ataer-Arguder-1.jpg\" alt=\"Ataer Arguder\" width=\"452\" height=\"316\" srcset=\"https:\/\/foundersnetwork.com\/wp-content\/uploads\/2020\/08\/Ataer-Arguder-1.jpg 794w, https:\/\/foundersnetwork.com\/wp-content\/uploads\/2020\/08\/Ataer-Arguder-1-300x210.jpg 300w, https:\/\/foundersnetwork.com\/wp-content\/uploads\/2020\/08\/Ataer-Arguder-1-768x537.jpg 768w, https:\/\/foundersnetwork.com\/wp-content\/uploads\/2020\/08\/Ataer-Arguder-1-100x70.jpg 100w, https:\/\/foundersnetwork.com\/wp-content\/uploads\/2020\/08\/Ataer-Arguder-1-560x391.jpg 560w\" sizes=\"auto, (max-width: 452px) 100vw, 452px\" \/>\u201cBoth sides need to be very careful, because this round\u2019s term sheet is the next round starting point,\u201d adds Arguder. \u201cIn 18 to 24 months, you&#8217;re required to perhaps triple your business. So valuation is critical.\u201d<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Founders shouldn\u2019t fall into the trap of seeking a higher valuation because it sounds more prestigious, or has the potential to attract more media attention, according to Arguder.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cIt&#8217;s a great burden on the founder as well,\u201d\u00a0 he says. \u201cThe term sheet is sent by the VC, by the way. And if you&#8217;re not an experienced founder, you may not think like three or four steps ahead.\u201d<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cIt\u2019s essential for founders to get legal counsel in evaluating term sheets, and to square that advice with their own goals with the business. That can start with knowing how to spot what\u2019s standard &#8212; and what isn\u2019t &#8212; in basic terms such as liquidation preferences,\u201d adds Collingwood.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cIt&#8217;s fairly standard to see a one times liquidation preference, which means if a company goes, bust the investor gets an amount equal to their investment back in priority to everybody else.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cBut if you&#8217;ve never seen that before, you&#8217;d have no idea of knowing whether or not that&#8217;s normal or not,\u201d says Collingwood. The higher the number floats above one, the more favorable it tends to be towards the investor.\u00a0<\/span><\/p>\n<span class='bctt-click-to-tweet'><span class='bctt-ctt-text'><a href='https:\/\/x.com\/intent\/tweet?url=https%3A%2F%2Ffoundersnetwork.com%2F%3Fp%3D18555&#038;text=%E2%80%9CIf%20a%20founder%20understands%20why%20a%20VC%20is%20asking%20for%20something%2C%20it%20can%20make%20negotiations%20a%20bit%20smoother.%E2%80%9D%20-%20%40Dentons&#038;via=foundersnetwork&#038;related=foundersnetwork' target='_blank'rel=\"noopener noreferrer\">\u201cIf a founder understands why a VC is asking for something, it can make negotiations a bit smoother.\u201d - @Dentons <\/a><\/span><a href='https:\/\/x.com\/intent\/tweet?url=https%3A%2F%2Ffoundersnetwork.com%2F%3Fp%3D18555&#038;text=%E2%80%9CIf%20a%20founder%20understands%20why%20a%20VC%20is%20asking%20for%20something%2C%20it%20can%20make%20negotiations%20a%20bit%20smoother.%E2%80%9D%20-%20%40Dentons&#038;via=foundersnetwork&#038;related=foundersnetwork' target='_blank' class='bctt-ctt-btn'rel=\"noopener noreferrer\">Share on X<\/a><\/span>\n<p><span style=\"font-weight: 400;\">Another challenge is understanding where to pick your battles and that starts with understanding the investors\u2019 rationale in asking for specific terms &#8212; liquidation or otherwise.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cIf a founder understands why a VC is asking for something, it makes negotiations a bit smoother,\u201d Collingwood says. \u201dFrankly, there are places where VC funds just won&#8217;t budge; they will expect a liquidation preference 95% of the time. So it&#8217;s not really worth fighting that battle.\u201d<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cA deeper understanding of your investors\u2019 motivations, and how they\u2019re aiming to make money off the investment will likely yield a stronger term sheet for both parties,\u201d says Arguder.\u00a0<\/span><\/p>\n<span class='bctt-click-to-tweet'><span class='bctt-ctt-text'><a href='https:\/\/x.com\/intent\/tweet?url=https%3A%2F%2Ffoundersnetwork.com%2F%3Fp%3D18555&#038;text=%E2%80%9CAs%20well%20as%20building%20a%20small%20business%3B%20you%27re%20building%20a%20growth%20machine.%20Term%20sheets%20need%20to%20be%20realistic%20because%20a%20VC%20wants%20to%20make%20an%20exit%20in%20the%20future.%E2%80%9D%20-%20%40ataerarguder&#038;via=foundersnetwork&#038;related=foundersnetwork' target='_blank'rel=\"noopener noreferrer\">\u201cAs well as building a small business; you&#039;re building a growth machine. Term sheets need to be realistic because a VC wants to make an exit in the future.\u201d - @ataerarguder <\/a><\/span><a href='https:\/\/x.com\/intent\/tweet?url=https%3A%2F%2Ffoundersnetwork.com%2F%3Fp%3D18555&#038;text=%E2%80%9CAs%20well%20as%20building%20a%20small%20business%3B%20you%27re%20building%20a%20growth%20machine.%20Term%20sheets%20need%20to%20be%20realistic%20because%20a%20VC%20wants%20to%20make%20an%20exit%20in%20the%20future.%E2%80%9D%20-%20%40ataerarguder&#038;via=foundersnetwork&#038;related=foundersnetwork' target='_blank' class='bctt-ctt-btn'rel=\"noopener noreferrer\">Share on X<\/a><\/span>\n<p><span style=\"font-weight: 400;\">\u201cYou&#8217;re not building a small business; you&#8217;re building a growth machine &#8212; that&#8217;s the idea at least,\u201d he says. \u201cTerm sheets need to be realistic, because a VC wants to make an exit at some point in the future. There are going to be other rounds, and maybe they\u2019ll want to go to a bigger VC and sell their shares. The expectations of a founder need to be managed.\u201d <\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Don\u2019t let term sheets trip you up. Dentons associate Joe Collingwood and Aura founder Ataer Arguder explain term sheet basics for the early stage founder, and break down how to &#8230; <\/p>\n<div><a href=\"https:\/\/foundersnetwork.com\/term-sheets-101-for-early-stage-founders\/\" class=\"more-link\">Read More<\/a><\/div>\n","protected":false},"author":31,"featured_media":18563,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_price":"","_stock":"","_tribe_ticket_header":"","_tribe_default_ticket_provider":"","_tribe_ticket_capacity":"0","_ticket_start_date":"","_ticket_end_date":"","_tribe_ticket_show_description":"","_tribe_ticket_show_not_going":false,"_tribe_ticket_use_global_stock":"","_tribe_ticket_global_stock_level":"","_global_stock_mode":"","_global_stock_cap":"","_tribe_rsvp_for_event":"","_tribe_ticket_going_count":"","_tribe_ticket_not_going_count":"","_tribe_tickets_list":"[]","_tribe_ticket_has_attendee_info_fields":false,"footnotes":""},"categories":[144],"tags":[1823,7962],"table_tags":[],"class_list":["post-18555","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-tech-startup-advice","tag-london","tag-startup-mentoring"],"acf":[],"featured_image_data":{"src":"https:\/\/foundersnetwork.com\/wp-content\/uploads\/2020\/08\/Joseph-Collingwood.jpg","alt":"Joseph Collingwood","caption":""},"_links":{"self":[{"href":"https:\/\/foundersnetwork.com\/wp-json\/wp\/v2\/posts\/18555","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/foundersnetwork.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/foundersnetwork.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/foundersnetwork.com\/wp-json\/wp\/v2\/users\/31"}],"replies":[{"embeddable":true,"href":"https:\/\/foundersnetwork.com\/wp-json\/wp\/v2\/comments?post=18555"}],"version-history":[{"count":0,"href":"https:\/\/foundersnetwork.com\/wp-json\/wp\/v2\/posts\/18555\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/foundersnetwork.com\/wp-json\/wp\/v2\/media\/18563"}],"wp:attachment":[{"href":"https:\/\/foundersnetwork.com\/wp-json\/wp\/v2\/media?parent=18555"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/foundersnetwork.com\/wp-json\/wp\/v2\/categories?post=18555"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/foundersnetwork.com\/wp-json\/wp\/v2\/tags?post=18555"},{"taxonomy":"table_tags","embeddable":true,"href":"https:\/\/foundersnetwork.com\/wp-json\/wp\/v2\/table_tags?post=18555"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}