Terms Affecting the Returns

Terms Affecting the Returns

October 9, 2020 by investor

Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.

There are many terms in a standard terms sheet for investing in a startup. 

Six terms have a direct impact on the return the investor receives. They are as follows:

– Pre-money valuation is the biggest factor in determining the investor’s return. This is often the term receiving the most attention in negotiations.

– Liquidation preference is increasingly being used to protect early investors as it gives them a return first before other investors.

– Options pool is a key consideration with regards to who pays for it. A founder-friendly terms sheet has the investors paying for it, while an investor-friendly terms sheet has the founders paying for it. 

– Protective provisions include electing board members who can influence operational decisions such as approving future fundraising rounds. 

– Co-sale rights and drag-along rights give the investor options for exiting early. 

– Finally, dividends — not common in early-stage fundings, are a source of returns to the investors in long-term holdings.

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
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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.