A term sheet is a non-binding agreement that lays out all the proposed terms and stipulations under which a private investor (VC, angel, or other), angel investor, or business owner will make an initial equity investment into a company.
In a later article, we will discuss other financing sources and how they can benefit your startup business. However, for now, let us focus on a simple way to use a term sheet to help you raise funding and what a term sheet means to investors. The purpose of this article is to educate you on the common format used by private investors.
In simple terms, a term sheet generally consists of four separate sections, with each section detailing the different terms of the funding deal. The first section is known as the “Source.” In this section, the name and amount of funding are listed, along with the number of shares being offered. In addition, this section typically includes the name of the company, the intended use of the funding, the anticipated start date, and an explanation of how the equity will be used. Unfortunately, as an investor, you will not have the opportunity to meet with the business owners to discuss any details regarding the funding.
Next is the “Startup” section. Here, you provide the company’s complete and total profile, including its mission, its business plan, and any financial projections for the startup. Also, you need to include information about your company, the fact that you are an angel investor, and your expectations for the business. Investors will generally look for a minimum investment to secure the equity.
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What is a Term Sheet and How it Works
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