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Understanding Term Sheets
Read time 0.9 minutes.
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.
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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.
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Onwards and Upwards,
