TheFunded publishes a plain vanilla term sheet for VCs

August 24, 2009 | Matt Marshall | Comments | |

term-sheet

TheFunded, a site that gives entrepreneurs a way to rate venture capitalists, continues to roll out services to help entrepreneurs in other ways. Today, TheFunded’s Founder Institute published a template document for entrepreneurs to use when they’re raising money.

Called the “Plain Preferred Term Sheet,” the document (embedded below) was inspired by a recent debate sparked by entrepreneur Chris Dixon (co-founder of Hunch) and investor Fred Wilson, who have been seeking a way to simplify the complicated provisions that have crept into the average term sheet. The term sheet, as its name suggests, is the document that contains all of the terms that govern an investment by a venture capitalist in a company.

TheFunded paid Silicon Valley’s top law firm Wilson Sonsini to author a template agreed to by those arguing for simplicity.

TheFunded founder Adeo Ressi says the document compliments the founder-friendly incorporation documents already developed by the Institute, which he said are used by almost 50 start-ups both within and outside of the Institute.

Here are the significant changes being proposed:

  • The elimination of participation — “Participation” lets investors “double dip” by getting both their liquidation preference (in other words, when a company is sold or goes public, they get the money that they invested back before the founders or other employees see their first dime) and their equity allocation.
  • A 1x liquidation preference — The liquidation preference has ranged from 1x to 3x in recent deals, according to TheFunded.com. A “1x liquidation” preference without participation means that investors choose to either (a) get 1 times their money back or (b) convert to equity and get the equity value only. This is a downside protection term.
  • Single trigger vesting — This allows founders to vest all of their equity and make money in an exit. Many investors require “double trigger vesting,” which means that the company needs to sell and the founder needs to be terminated for his or her shares to vest.

Also worth reading is the piece we just published by Wilson Sonsini lawyer Caine Moss about how the seed round has become the new Series A.

Finally, this isn’t the first push for simplicity in term sheets. Ted Wang, of Fenwick & West, argued something similar two years ago, in his piece on Reinventing the Series A.


FFI Plain Preferred Term Sheet -

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Matt Marshall is editor and CEO of VentureBeat. Follow him on Twitter at @mmarshall, and follow VentureBeat on Twitter at @venturebeat.

  • pokers
    Ya. You doing what actually i am looking for. Means First i need to study it then i have some good suggestion. But at first vision it seems very very helpful. Thanks
  • Other than Fred wilson (at avc.com), wondering if there really will be much traction... i hope so. Truly. BTW, did we confuse the participation vs preference term descriptions above?
  • FounderInstitute
    "Preference" just means that the equity issued is superior to common stock. What are you referring to, rkorba?
  • might just be my aged brain... thought matt's first 2 bullets above were reversed, but rereading, i might just be befuddled. :)
  • mikesullivan
    I think it's a bit of a misnomer to call this a "plain vanilla" term sheet. There's still unnecessary complication in this term sheet - for example, it's still requiring registration rights, which I would argue are really unnecessary to deal with for a seed stage company. What it really is, is a founder-friendly term sheet. 1X liquidation, no participation, single trigger on founders' equity. Those are pro-founder provisions, and they're no harder to draft than the pro-investor alternatives.

    Ted Wang's suggestion from a couple years ago, on the other hand, really did address the complexity problem - which is that early stage deals have a lot of unnecessary complexity that drive up the legal bills for small seed financings. He suggested a bunch of sensible things - like eliminate registration rights, eliminate the legal opinions, and combine/collapse the number of investment documents down to three. *That* is what the Valley should get behind, IMO.
  • Thanks Mike. As Matt noted, I've been pushing for this for a while. If we really want to bring down the costs and time associated with a seed round, we need to go further. If I find an investor ready to do a truly "Simple" Series A, I am ready to do that deal
  • Jeff_Berlin
    Great article Matt, not only happy this is happening, but very happy it is being reported. This can be good for those not fully equipped with experience being funded and/or those who don't have access to easy legal council.
  • Although I applaud the effort at eliminating unnecessary paperwork and negotiations, entrepreneurs should not assume that using this template would significantly reduce the time or cost associated with a financing. Based on my experience with many venture deals, a very small part of the attorneys fees and time to close a transaction is due to a lack of a good template term sheet.

    In fact, I would guess that 95% of the time and cost associated with a financing is around legal due diligence, reps and warranties and their associated Schedule of Exceptions, negotiations with former investors, clean-up work on corporate structure, etc.

    In Silicon Valley, there has always been a de facto term sheet associated with a given round of financing among the various established law firms/venture firms, so this is more of a marketing statement than a real change.