Many promoters and budding entrepreneurs have some notions about termsheet, some treat it as the scariest piece in the investment process and for some getting a termsheet is a milestone.
In simple words, termsheet is a guideline document for entrepreneur issued by the investor. If you are playing a game no fun without playing with rules and regulations. So treat this investment process as game of scaling the venture. I have come across term sheets ranging from $200k-$20M, good news is most of the clauses are common irrespective of size of investments.
Lets look at the most common clauses in a tech investment termsheet i have come across:
Vesting of Founder’s shares :
The shares held by Founding team will be locked for 3 years; subsequently they will unlock in equal annual installments over a period of 3 years. If any of the founding team decides to leave the company at a time before such period , the locked share would have to be sold at par to the existing shareholders of Company and Investor will be given the first option to purchase the said shares. Should Investors decline to purchase the shares, such shares will be sold to other shareholders in proportion to their shareholding. Such shares at the investor discretion can be placed in ESOP Pool.
The company will create an ESOP pool of 6% prior to investment.
Tag Along Rights:
Subject to the lock-in provisions herein contained, in the event the Founders sell their shares to a 3rd party investors would have a right to sell its shares on the same terms to the same party. The tag-along shall be a pro-rata right so long as the total number of shares transferred by the founders is less than 50% of their share holding in the company. If any shares in addition to the above are proposed to be transferred, the investor shall have the first option to sell their shares to proposed purchaser.
Right of first Refusal:
Investor will have the first right of refusal on any sale or transfer of shares held by any shareholders and on any new issue of shares.
Drag Along is also a common clause but generally absent in early stage tech investment term sheet.
The good news here is there is nothing called standard termsheet/clauses, each and every clause is debatable and entrepreneur can voice his concern with the investor. Its advisable to hire a legal person who has experience in transacting VC investment deals.