Tomasz Tunguz / November, 2017
What should I pay attention to in the term sheet?
Tomasz Tunguz, Partner at Redpoint Ventures explains three things to pay attention to in a term sheet; voting rights, valuation and option pool, and founder vesting.
The most important thing when working with a VC is the partner. So that’s outside the term sheet, but you really want to have a great relationship with the investor that you choose. That is because in the success case venture capitalist often work with startups for 7 to 10 years, which is longer than most marriages in the US. So it’s really important to invest. Invest time to figure out whether or not you have a good chemistry between you and the partner who is going to be joining the board.
The three things that we advise founders to pay attention to, the first is control issues or control questions, so that’s voting rights. Understanding who has what voting in control rights, which also is related to the board composition. Typically you see one board seat be given in each round. The second is valuation and option pool, what is the implied dilution to the founders.
There’s a give and take in a negotiation but no matter what happens both investors and founders really want to make sure that the capitalization table is structured well enough so that the company can continue to raise the capital that it needs in the series B and C and so on. Then the last component is founder vesting, that is the schedule on which founder’s options vest. Depending on how young or old company is, there might be a founder investor schedule or there might not be. But that’s something that is really important to pay attention to because it affects individuals.