Angel and Venture Capital Investing, Part One: The Term Sheet

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In this first episode of a three-part series called “Angel and Venture Capital Investing,” Trusted Counsel’s Mike Siavage reviews the term sheet, a summary document of key terms in contemplation of a financing―along with other elements for entrepreneurs to consider.

Here are three of the top questions from the full interview with Mike:

Prior to the term sheet, what should a company do to raise money?

What I tell my clients is that there are various stages of investment in your company, and they come from various places. You’ll typically need $30,000 to $50,000 just to start a company, to pay for good advice and then to acquire the people for the management team. So funds will usually first come from your friends and family, people you know in your own network (who are supporters of you)―and from your own pocketbook.

Traditionally, the second phase to raise money is through angel investing. Angel investors are a little bit more sophisticated about putting money into companies, and they’ve done it before. Typically you will not want to set a valuation in this phase.

Next, the entrepreneur will want to go back to the angel investor for another round of raising funds. I usually advise the entrepreneurs with companies who are doing that angel round on a convertible debt instrument (a debt or loan instrument that an investor gives to a company with the intent that it will convert later to equity and not be paid back as a standard bank loan would be) to produce their own term sheet because a lot of times angels will ask you directly, “What are your terms?” It looks professional on the side of the entrepreneur to have something to provide the angel, and it’s typically a convertible debt term sheet.  

The last stage is a standard venture capital investment. You get to this stage when your company actually has revenue, a history and a future. The VCs will normally do that term sheet, although it’s quite standard and most of its terms could be argued on what’s commercial at that stage of the investment.

What should a company not try to negotiate in the term sheet?

Registration rights. Registration rights mean that those who invest in your company have a right to participate in a public offering― if you have a public offering. Well, you don't usually get to a public offering with your Series-A round. There's usually going to be a Series B and Series C and D and E. One aspect of that is that the registration rights are going to change in those further-on rounds. So, you might as well not fight about them right now, anyway. Secondly, investors are not going to spend much time with you telling them that you want to only give them two S1 registrations in a year―because I'm not sure they even understand their own term sheets, from that perspective.

After a company obtains a term sheet, what’s the timing to getting the Series A done?

Well, there's going to be diligence usually after that, so probably a month of diligence, and then a look at the documents and finally negotiating the documents. I’d say two to three months.

Additionally, investors and business owners will learn about:

  • Timing for term-sheet preparation
  • Finding and picking the right angel investors
  • Terms of convertible debt
  • Other resources available for entrepreneurs and investors

Learn about the other term-sheet questions Mike addresses by streaming the conversation in its entirety in the player below, or download it to your mobile device via iTunes. Don’t miss a single episode, subscribe to our show “In Process Podcast” on iTunes to receive this episode as well as future episodes to your smartphone.