There are over 125 terms in the NVCA glossary for terms sheets. So which key terms should the investor focus on?
Here are six key terms to consider for your startup investment:
– Valuation or the price you pay for the equity is the most important term that impacts the return to the investor.
– Participation rights define the investor’s right to invest in future rounds. Most startup investors invest a smaller amount at the seed level but invest larger amounts at the Series A. It’s important to maintain your position in a successful startup.
– Board and Information rights give the investors a voice in the company and what information they can expect to receive.
– Liquidation preference pays back the holding investor first, and then the remaining funds are allocated to the investors based on their ownership percentage. This sets a floor on the investor’s return.
– Redemption rights give the investors the right to sell their shares back to the company if they want to exit before an acquisition.
– Unvesting founder’s shares require the founders to revest some of their shares. This provides equity to compensate the founder’s replacement in the event the founder leaves early.
There are many other terms that could be included, but specifically, consider these for your next investment.
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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.