Entrepreneurs are often not experts in the area of term-sheet negotiations and all of the surrounding issues. Investors sometimes “present” the terms they’d like and expect the entrepreneurs to react. This frequently leads to lots of expense just to get to an understanding of what’s being asked for. A lack of understanding can lead to expensive and difficult negotiations when more clarity earlier in the process may have produced a more efficient and less difficult result.
Now that I’m more often on the other side of the term-sheet, I’ve tried to present term-sheets to entrepreneurs accompanied by a philosophical explanation of what I’m proposing, and why.
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I’ve attached a spreadsheet to this article to illustrate the issues in numbers. You can vary both valuation and term-sheet assumptions (in the gray boxes) to assess the impact on the values of the business. Note that this applies only to earl stage Series A-type equity financings and assumes no cash dividends are paid to investors. It also assumes the entire value of the investment is captured for investors at a sale of the company in the time specified in the term-sheet.