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A term sheet is a relatively short document setting out the key terms of the investment agreed upon between the company and the investor in user-friendly language. It is also referred to as a Memorandum of Understanding (MOU). It includes the business and finance terms and could include legal terms regarding confidentiality and dispute resolution.
Founders are often risk-takers with lots of energy and great business ideas. And that is fantastic, as long as you remember to set up the correct legal foundation for your venture. Not having the proper legal basis for your startup might be too big a risk. Having the correct legal documents in place is essential for the future success of your startup.
Whether you are looking to attract more investors or make key appointments for your start-up, you need a strong, up-to-date cap table. An accurate cap table gives potential investors the information they need to decide whether they will invest in your venture. It also helps stakeholders to keep track of their interests and shows potential employees what you can offer as stock options.
Raising money for a start-up can take many different forms. One way is to use convertible instruments such as convertible notes, SAFEs and KISSs. When using a convertible, the start-up receives the investment but does not issue shares at that stage. The agreement can ‘convert’ into shares in the future.
When we refer to investors’ rights, we refer to the legal and financial protection granted to investors when receiving shares in a start-up. It can also refer to certain privileges. In the early stages, a start-up can raise funds through convertibles. The founder will receive the money but does not need to issue shares at that stage.
The initial funding rounds of a start-up are often referred to as seed funding. At this stage, investors invest in the founder, the idea, and the company’s potential. That money is usually used for product development and market research. Many start-ups don’t make it to the next round of funding.
In the excitement and enthusiasm of starting a new business, formalising agreements are often overlooked. Startup founders are often friends or acquaintances, and it is easy to fall into the trap of only discussing roles, responsibilities, ownership structures and other important matters verbally. This can be dangerous.
A SAFE (which stands for Simple Agreement for Future Equity) is the most popular type of convertible for early-stage startups. It was originally created by Y Combinator in 2013.