What is a venture capital term sheet?
A term sheet is a document that summarises the key terms of an investment.
Although the majority of terms are non-binding, it is a crucial document which determines the way a deal is structured between an investor and a company. It is used by lawyers as the template to draw up the more detailed investment agreements down the line.
“Term Sheets are crucial documents that determine how an investment will be structured between an investor and the management team, and act as the template for the investment agreements to be drawn up” says Jonathan Hollis, managing partner of Mountside Ventures, which has produced a guide to term sheets for founders.
A term sheet consists of 4 pillars
#1 – Valuation
Including the key investment terms and types of shares included in the investment
#2 – Deal conditions
Including the diligence requirements, IC approvals & expected share options.
#3 – Control
Including founder vesting, minority protections and investor consents.
#4 – Binding terms
Including the exclusivity period, confidentiality and associated fee
Ordinary shares vs preference shares
Ordinary shares are the most common form of shares and carry no special or preferred rights. They pay out in proportion to the equity they hold. Preference shares offer shareholders certain rights that are not shared by ordinary shares, typically when the company is sold. They are used to provide investors with additional protections.
According to Mountside Ventures, 80 per cent of venture capital investors ask for preference shares, with a minority asking for ordinary shares.
When it comes to VCT and UK EIS investors, the percentage of preference shares asked for drops to 60 per cent. Forty per cent of UK EIS and VCT investors opted for ordinary shares. This is due to the constraints enforced by HMRC on the type of preference shares they are allowed.
The split between ordinary and preference shares is consistent across stages, although ordinary shares became less common, the higher the funding round — i.e. Series C, Series D.
How long does it take for a VC deal to close?
The majority of funds take between 8 and 12 weeks to perform their due diligence and to write up the investment agreements.
However, the quickest VC fund deals can be done in as little as two or three weeks.
Mountside Ventures, an advisory firm which specialises in early-stage fundraising and exits, interviewed more than 200 European investors for its Demistifying Venture Capital Term Sheets report with more than £11bn under management.