The term sheet is a critical document that gives a ‘snapshot’ of the key terms and conditions of the proposed funding by an investor. It also serves as a ‘blueprint’ that will be used by the startup lawyer engaged to prepare the fundraising documents and shareholders agreement that will govern the relationship between the startup, its present shareholders and the investors.
The question of who should issue a term sheet in a startup funding round is an important one, as it can have a significant impact on the negotiation process and the overall success of the funding round.In this article, we will be looking at who exactly is the responsible party to issue a term sheet in a financing round.
Who usually issue term sheet to a startup in a funding round
The lead investor is usually responsible for issuing the term sheet. The lead investor may be a seasoned angel investor, a VC fund, or a company making a strategic investment in your business.
Since the investor is committing the largest sum of capital to the round and taking on the most risk. The investor has the vested interest to ensure that the terms are favourable and the startup is positioned for success. The investor also usually has the leverage and negotiating powers to set the terms of the deal, which can help to streamline the negotiation process and reduce potential conflicts.
Exception to the general rule: Term sheet during a families and friends round
But in a families and friends financing round, you may need to take the initiative to hire a startup lawyer to help you prepare and draft a term sheet to them as potential investors. Since they are not institutional investors (i.e. essentially, people such as money managers and VCs that invest in startups for a living), it is unlikely for them to know or have the experience to prepare a term sheet.
By issuing the term sheet themselves, the startup can formalise the terms of the investment and get the investors to commit to investing in your startup before preparing the formal agreements.
Regardless of who issues the term sheet, it is critical that you take the time to make sure that the terms set out in the term sheet are acceptable to all parties involved.
All the parties should be happy with the terms and approach the negotiation process in good faith, with a focus on building a mutually beneficial relationship that will help to drive the success of the startup.