Of Terms and Sheets

A few thoughts on term sheets:

There are lots of “standardized” term sheets out there designed to streamline the startup financing process. The problem is most of them are drafted in the US with US legal considerations in mind. Watch out for those… If you see the word “stock” as opposed to “shares”, chances are it’s a US-based model.

MaRS has developed a term sheet template for startups in Ontario, but take a quick look and you’ll note that this is all about preferred shares, not common shares. It’s definitely useful, but depending on the size of the seed round, preferred shares might not be right for your startup. In many cases actually, the first money is coming in the form common equity, which is identical to what the founders are issued following incorporation. Don’t get stuck in the trap of thinking that you MUST issue preferred equity to your investors. This is a myth.

Something you should be weary of when looking at a term sheet is focusing on the valuation, the dilution and the amount of the investment. Those are important, but don’t forget to read the rest of the term sheet!! There are clauses in there that you can negotiate if they are off-market. How do you know what’s off-market? You don’t. Someone who sees lots of term sheets however will. So don’t be shy – go out there and get some independent advice from your lawyer before you sign the term sheet. And remember, there is no such thing as a dumb question.

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