Video series: How investor term sheets work (Series A term sheet breakdown)

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When you’re fundraising for a startup, chances are you’ll have to negotiate a term sheet with investors. Unfortunately, the language in these documents can be complex, overwhelming, and difficult to understand—and with precious little time to close the deal, it can become time-consuming and expensive to work through every section of the term sheet with your legal advisors.

Luckily, at Carta, we have some very smart friends. In this video series, we linked up with Mike LaPlante—an experienced startup attorney at Perkins Coie—to break down a Series A term sheet in plain English. We hope they give you helpful context to move deals along quickly (and avoid wasting time and legal fees).

Part 1: The offering terms

In the first episode of our deep dive, Mike breaks down section 1 of a Series A term sheet, the offering terms. We learn:

  • The difference between the stated pre-money valuation in the term sheet, and the effective pre-money valuation after all mathematical factors have been considered.
  • How the size of the option pool can be an important negotiation lever for the investor.

 

Part 2: The charter

Now that we understand the offering terms, Mike takes us into the second section of our Series A term sheet, the charter. We learn about:

  • The charter: a list of rights your preferred shareholders are entitled to after you accept money from them.
  • How much equity investors typically expect to take when they invest in your Series A.
  • Protective provisions, the specific actions you need investor permission for.

Part 3: The stock purchase agreement, and investor rights agreement

Now that we understand the offering terms, Mike takes us into the five major agreements you’ll typically find in a Series A term sheet, starting with the first two: The stock purchase agreement and investor rights agreement. We learn:

  • In association with the financing, your investors will typically ask you to cover their legal fees (up to a certain amount).
  • How the threshold for “major investors” is defined, and what it means for you.
  • What the rights of your “major investors” are, and how they differ from your other investors.

 

Part 4: Board structure, the right of first refusal, and voting agreement

Rounding out the final agreements in a term sheet, Mike takes us through the right of first refusal and co-sale agreement and the voting agreement. We learn:

  • Drag-along rights exist for administrative ease. If the majority of the common holders, preferred holders, and board of directors approve a sale of the company, this clause states that everyone signed to this agreement agrees to vote in favor of the sale as well.
  • Board structure is one of the most important things you’ll negotiate in a term sheet. Mike takes us through the various subtleties in a term sheet that could result in the founder losing control of their company.
  • Some investors will ask you to re-vest your shares, which typically shows up in the “Other Matters” section of the term sheet.

 

At Carta, we help startups with fundraising, compensation, valuations, equity management and much more. Talk to us to find out how we can help you grow.

DISCLOSURE: This communication is on behalf of eShares Inc., d/b/a Carta Inc. (“Carta”).  This communication is for informational purposes only, and contains general information only.  Carta is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.  This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests.  Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor.  This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein. ©2021 eShares, Inc. d/b/a Carta, Inc. (“Carta”). All rights reserved. Reproduction prohibited.

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