Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.
There are many terms used in terms sheets but there are only a few that have a significant impact.
Here are the key ones:
– Liquidation Preference — a liquidation preference gives the shareholder their initial investment back first, before splitting the rest of the proceeds.
– Non-Participating Preferred — the investors receive preference over the common shareholders.
– Anti-Dilution — investors retain their ownership percentage through subsequent rounds of funding.
If they maintain their full ownership, then this is called Full-Ratchet Anti-Dilution.
– In a Weighted Average Anti-Dilution, the founders get diluted but not as much.
– Pay to Play — a pay-to-play clause incentivizes investors to continue investing in subsequent rounds. If not, they lose some portion of their ownership stake.
– Warrants — a security that gives the holder the right to buy stock over a certain timeframe and at a specific price.
These are key terms to look for in a terms sheet.
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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.