A Series A round is the initial round of investment from a venture capitalist or “angel investor,” and it is defined by the parameters contained in the Series A Term Sheet. Each round of investment has its own set of terminology and meanings, and this one covers the phrases used when an entrepreneur or small firm seeks outside capital backing for the first time.
If you’re a small company owner or entrepreneur and a venture investor has just given you a Series A Term Sheet, don’t sign it just yet. Many company owners have been swayed by the figures and signed a term sheet that was unfavourable to them simply because they overlooked a hidden provision or discovered a term too late.
It’s vital to realise that term sheets are non-binding, which means they’re only a tool to move the negotiation ahead with certain phrases that provide the groundwork for a dialogue. Except for the ‘Exclusivity’ and ‘Confidentiality’ clauses included inside, a ‘term sheet’ is only an expression of purpose and should not be taken as a binding agreement.
Important Terms for Founders When Reviewing a Series A Term Sheet
A Sequence A term sheet for a private business round of investment may be as lengthy as 4,000 words, although that is frequently too much information. The following keywords should be prioritised by the founders:
1. Share Classification and Option Pool
At this point, the venture capital investor often subscribes to a preferred class of shares. These shares have rights that regular shares owned by the founders, workers, and others do not have.
Because the investment is made at a certain period in time based on the firm value and risk profile at that time, distinguishing the rights is typical practise.
2. Assessment and Milestones
This section describes the previously agreed-upon business value prior to the fresh capital inflow. It is used to calculate the price per share that investors will pay. In many circumstances, investors may not want to make the whole investment at once, preferring to invest in stages, known as trenches, that are subject to particular completion goals.
Failure to fulfil a milestone does not inevitably indicate that the investors would abandon the agreement; rather, it may mean that they may seek other conditions for those sums.
3. Payment of Dividends
Venture capitalists like living on the edge and want to invest in early-stage firms in order to maximise their return on investment. This section of the Series A term sheet specifies what investors intend to do with the dividends they get as a result of the company’s performance – whether they want to reinvest them or take them as payment.
This section sets the investors’ liquidation preferences in the event that the firm is liquidated for whatever reason. Preferred shareholders normally get a portion of the profits before other shareholders, but the form of the liquidation preference is negotiated to reflect the risk associated with each investment round. The higher the necessary return, the greater the risk.
5. Founder Stocks
The choice of investors to invest in a concept is heavily influenced by the founders, senior workers, management, and others engaged in the company’s development. As a result, investors are normally want to guarantee that key people stay involved with the concept, therefore this section describes the conditions for founder shares if they leave the firm within a particular time period.
Many more provisions, including as redemption, conversion, voting rights, anti-dilution, and other safeguards, are included in most Series A term sheets for both founders and investors. It is critical to deal with an experienced lawyer who can explain the paperwork in clear English and verify that you understand the provisions before signing.