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The
Term Sheet’s Role in Raising Venture Capital
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by:
Dave Lavinsky
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Entrepreneurs and companies who are seeking
venture capital often negotiate with one or more venture capital firms
on a number of important issues. These issues include the amount of
capital to be raised, the investment terms, etc. The document which
summarizes these terms is known as a "term sheet."
The term sheet is similar to a letter of intent, that is, it is a
nonbinding summary of the key points of the transaction. These points
are later covered in detail in the Stock Purchase Agreement and related
agreements signed at the time of execution of the transaction.
The value of the abbreviated term sheet format is that it speeds up the
process of consummating a transaction. Specifically, it allows the
parties to agree on the general terms of the transaction rather than
having to debate less important details. In addition, because it is not
binding, it allows the parties to take their discussions to the next
level without the danger of committing too much. Note, however, that
some parts of a term sheet may be binding. Typically the binding
aspects only refer to confidentiality and disclosure issues.
Venture capital firms, and not the companies seeking capital, typically
prepare the term sheet to include the terms under which they are
willing to invest their capital. Alternatively, when seeking capital
from angel investors, firms typically create their own term sheets for
the angels to review. This fact tells a bit about the balance of power
in an investment transaction. Venture capital firms are often more
sophisticated and have more power than the companies seeking capital.
Alternatively, angel investors are typically less sophisticated and
have less power, and are more prone to consider the investment terms as
laid out by the company seeking capital.
Getting to a term sheet is a key milestone in the capital raising
process. Although not all term sheets result in a transaction, the term
sheet shows that both parties are legitimately interested in executing
a transaction. It is then up to the investor and company to agree upon
the details.
About the author:
GT Business
Plans has developed over 200 business plans for clients that
have collectively raised over $750 million in financing, launched
numerous new product and service lines and gained competitive advantage
and market share. GT Business Plans is the sister site of GT Venture Capital
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