Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.
There are many terms used in terms sheets but there are only a few that have a significant impact.
Here are the key ones:
- Liquidation Preference -- a liquidation preference gives the shareholder their initial investment back first, before splitting the rest of the proceeds.
- Non-Participating Preferred -- the investors receive preference over the common shareholders.
- Anti-Dilution -- investors retain their ownership percentage through subsequent rounds of funding.
If they maintain their full ownership, then this is called Full-Ratchet Anti-Dilution.
- In a Weighted Average Anti-Dilution, the founders get diluted but not as much.
- Pay to Play -- a pay-to-play clause incentivizes investors to continue investing in subsequent rounds. If not, they lose some portion of their ownership stake.
- Warrants -- a security that gives the holder the right to buy stock over a certain timeframe and at a specific price.
These are key terms to look for in a terms sheet.
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