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Understanding Term Sheets
Read time 0.9 minutes.
When I release my full course, I’ll include a deep dive into specific clauses in terms sheets, but today I still wanted to discuss some high-level thoughts and information on Term Sheets.
When you get a term sheet, there is one fundamental thing you need to understand: A term sheet is a balance between finances and control.
Every clause in a term sheet can be classified as either a “control” clause or a “financial” clause. Your role as a founder is to make sure you are getting a good valuation and financial terms without giving away too much control. You need to balance the two interests.
Too many founders focus too much on finances and end up giving away control.
 | Mode saw 150x revenue growth from 2019 to 2022, a leap that has made them one of America’s fastest growing companies. Mode is on a mission to disrupt the entire industry with their "EarnPhone," a budget smartphone that’s helped consumers earn and save $150M+ for activities like listening to music, playing games, and ... even charging their devices?! |
What are the common control clauses to look out for:
Restrictive Provisions - These are things that will require investor approval, like new hires, spending more than $50k, signing a lease, giving away equity, etc.
Board Seats - The board will set your salary, and the company’s direction and can fire executives; it is key for control
Voting Rights - Investors can work a contract so that even with 20% ownership, they have 50%+ of the votes allowing them to control the company.
When you get a term sheet, make sure to pay as much attention to these control clauses as you do to the financial ones. A full breakdown of every major clause in a term sheet will be included in my full course when its released in the next 2-6 weeks.
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*Disclosure: Please read the offering circular at invest.modemobile.com. This is a paid advertisement for Mode Mobile’s Regulation CF Offering.