We briefly scratched the surface of the dozens of potential terms that could be included in a term sheet, but I wanted to emphasise a few points from our discussions.
1. In most cases the “terms” in a term sheet (or more accurately in the Investor Agreement – which is the legal document) are not *law* but contractual conditions that become binding upon successful completion of the agreement. As such, the writer of the terms can ask for anything they want. Just because a clause in the agreement is titled “Liquidation Preferences” doesn’t mean that is “boilerplate” and there’s not some little twist in there that make its different than you expect. Golden rule – always read the fine print!!! And if you don’t understand the fine print, or sometime, even if you think you understand the fine print, ask an attorney.
2. Terms in term sheets are like vestiges of DNA – they served a very important purpose at some stage, under some set of conditions, or as a result of some catastrophic event, and are just carried along – “in case”. The result is two-fold. (a) Terms sheets always seem to get bulkier and (b) just because there’s something in a term sheet that looks horrible, doesn’t mean that you can’t negotiate it away, or down to more agreeable term.
3. Terms can be fundamental or fads, depending upon the economic climate, legal situation or political temperature. As many of you are aware, there is very contentuous but very real legistlation on the books that would treat VC carried interest as ordinary income verses capital gains. That has the potential of having a real impact on VC net income, so – even though I have no idea what – I’m expecting significant chance in terms to “compensate”.
Finally, one of the reasons for spending a whole session on one or two of the elements in terms sheet was to get you all to be become smartreprenurs. The challenge is that you get involved with two possibly three or four term sheets in you lifetimes. I’ve seen probably twenty. One of the values of @StartVI is the aggregationof deal experience and the accumulation of specific knowledge that will help individuals. So? Start asking questions and sharing issues? It’s the “consequences” of terms that you need to be wrapping your heads around, not the specific interpretation. As we discussed on Wednesday, the financial impact of Liquidation Preferences can be negotiated for a better valuation. If someone is asking for high multiples of Liquidation Preferences *and* a low valuation, either they don’t know how it works, or they do and they’re counting on the fact that *you* don’t.
Stumbled across this blog post and thought anyone reading this post would be interested – http://www.gabrielweinberg.com/blog/2010/06/how-to-learn-about-angelvc-term-sheets.html