Raising Venture Capital
Entrepreneurs and corporations who are looking for venture capital regularly negotiate with a few venture capital firms on a number of important issues. These issues include the amount of capital to be raised, the investment terms, etc. The document which summarizes these terms is often known as a “term sheet.”
The term sheet is similar to a letter of intent, that is, it is a nonbinding summary of the key things of the transaction. These points are later covered in detail in the Stock Purchase Agreement and related agreements signed at the time of execution of the transaction.
The value of the abbreviated term sheet format is that it speeds up the method of consummating a transaction. Particularly, it allows the parties to agree on the general terms of the exchange rather than having to argue less critical details. Additionally, because it isn't binding, it permits the parties to take their discussions to a higher level without the danger of committing too much. Note nevertheless , that some parts of a term sheet may be binding. Typically the binding aspects only refer to confidentiality and disclosure issues.
Venture capital firms, and not the companies seeking capital, typically prepare the term sheet to include the terms under which they are ready to invest their capital. Or, when looking for capital from angel investors, firms sometimes create their own term sheets for the angels to study. This fact tells a bit about the balance of power in an investment exchange. Venture capital firms are typically more classy and have more power than the companies looking for capital. Or, angel investors are generally less classy and have less power, and are more prone to consider the investment terms as defined by the company looking for capital.
Getting to a term sheet is a key landmark in the capital raising process. Although not all term sheets result in an exchange, the term sheet shows that both parties are legitimately keen on executing an exchange. It is then up to the financier and company to agree upon the details.
John has over 1 years of experience in business promoting sales engineering general management online property planning. He has worked for and with worldwide firms like IBM Electronic Data Systems and Mahindra Brit Telecomms. John has a BS from Brown in P.C Science an MA through IBM in Industrial Electronics as well as a PhD in Global Trade and Management from the London University of Business.