Term Sheets

Term sheets are funny things. Although they should be straightforward they often end up being anything but. They should be straightforward because, as the European VC ecosystem has developed, so has the understanding of what high-level terms of a VC investment should look like on paper. In the real world though, multiple parties (often with different motivations) negotiate term sheets and so it’s not really surprising that reaching agreement on the key terms of economics and control can be difficult.

I’ve spent time on both sides of the table negotiating term sheets. When I started in VC, I worked as a lawyer and negotiated term sheets on behalf of startups. Now, as an investor with Draper Esprit, I negotiate term sheets from a VC’s point of view. There are a couple of observations I have about VC term sheets that I’d like to share.

Shorter is better

Almost everyone agrees with this in principle. Few keep to it in practice. Some investors are good at writing short term sheets and some even take pride in their ability to keep an entire term sheet to a single page. My view is that you probably need more than one page to settle the key commercial terms before you move to negotiating the longer form investment documents. But you don’t need that much more — and you certainly don’t need 10 pages of terms (at that point you might as well be negotiating the investment documents). Draper Esprit’s term sheet is three pages of terms, and we then add on a page each for signatures, cap tables and consent matters.

Clarity is important

Obviously, clarity of language in the term sheet is important — but so is the clarity of understanding between each party of what that language actually means. I’ve had situations where, months after signing a term sheet and only days from closing, a founding team realised that the shares being bought by the investors had significantly different rights to what they had understood all along. In my experience, you avoid these situations by being as explicit as possible if you have particular requirements or concerns. Not everyone reading the term sheet will be dialled in to the detail in exactly the same way, so if there’s something that’s important to you, spell it out in person as well as on paper.

Details matter

Again, this risks stating the blindingly obvious — but when you get down to this stage of the fundraising process, details really do matter. As a founder, this is absolutely one of the times for you to get stuck in. If you have your first term sheet in hand, congrats. Now, please go read Brad Feld’s excellent book in its entirety. Better yet — if you’re starting to think about going out to raise money, go read Brad’s book first. It really is excellent and explains all the key terms both from the investor and entrepreneur point of view. Having a handle on these details at an early stage should save you some time, money and headaches later on.

Like almost everything else to do with fundraising, a term sheet should not be an end goal in itself but rather a step in a longer journey. However, it is one of the most important steps as it shapes the next portion of that journey — it determines who is coming along with you for the ride and what sort of fuel is in the tank. So it is worth getting it right.