Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.
Term sheets tend to favor the founder over the investor or the other way around.
Here is how to tell if you have a founder-friendly term sheet:
- Valuation skews to the higher end of the market in favor of the founders.
- There’s no liquidation preference for the investors.
- The option pool shares will be paid for by both founders and investors and not founders alone.
- There are no performance reviews nor non-compete clauses for the founders.
- There are no dividends paid to the preferred shareholders.
- The term sheet uses a broad-based weighted average for anti-dilution and includes provisions for the investors to “pay to play”.
- The investors must pay their own legal expenses.
- The term sheet does not force arbitration which means the founders and investors can use the courts.
Look for these key points in a proposed terms sheet to indicate which party it favors.
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