Investor Term Sheets
Term sheets provide an overview of a proposed investment. In order to simplify matters, term sheets are usually simple. However, a term sheet can include provisions that have implications. In order to make sure you are protecting your business, learning how to read term sheets is crucial.
The star of a term sheet is the investment amount. Many readers see this one number and get side-tracked from any other investment terms. This additional information could provide information regarding the value of the business, contingency, installment payment plans, and particular dates. Understanding these contingencies listed in the term sheet will make it easier to secure payment.
A capitalization table is also usually included on a term sheet. This table shows the ownership interest of each party involved. Anyone with equity interest in the business is included on this table. It is important to take note of each party’s ownership interest.
In order to protect investor’s ownership, anti-dilution clauses are commonly included in term sheets. Anti-dilution clauses allow for more investor/employee equity in the future. Anti-dilution clauses are not a deal breaker, but if you need the flexibility to sell equity, make sure the clause does not impair that.
Lawyers can help review investor term sheets in order to help read, understand and interpret these provisions. They can also help create alternative ways to protect your interests.
