Term sheets lean to the founder or to the investor. One that leans to the founder is called a founder friendly term sheet.
It has some of the following characteristics:
The term sheet provides that the Preferred Shares will receive the same number of votes as the number of Common Shares it could be converted into.
The liquidation preference is limited to the original purchase price of the shares, plus any declared and unpaid dividends.
The option pool for future hires is not included in the pre-money valuation.
The term sheet is silent regarding individual founder or employee performance reviews.
The term sheet is silent on the issue of non-competition, which makes it possible for founders to find work after they leave the company.
For at least the first two (2) years of operations, the company will not agree to pay the legal expenses of any investor as a condition of investment.
The term sheet is silent on dispute resolution, which leaves the door open for the company and its investors to go to court rather than arbitration.
These are some key points to look for you in a proposed term sheet that indicates which party it favors.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.