The Funded Releases Term Sheet Template For Company Founders and Investors
By Anna Johnson on September 8th, 2009The Funded, the website founded by Adeo Ressi, where people rate venture capitalists, has released a founder-friendly basic term sheet for use by investors and entrepreneurs.
According to The Funded, this first round term sheet aims to protect founders and save on legal fees, which, according to TechCrunch, average $50,000 or more per venture round.
Key terms include the removal of participation with preferred stock, a 1x liquidation preference, and single trigger vesting acceleration on acquisition.
As explained by TechCrunch’s Michael Arrington, the 1x liquidation preference means that, when the company is sold (via a private sale or on the public markets) an investor can only take out his initial investment before founders and employees get their shares. VCs have been known to get 2x and 3x liquidation preferences, enabling them to take out much more, before founders and others can do so.
The elimination of the participation means that rather than enabling (via participation rights) an investor to take a pro-rata share of money in a sale even after the liquidity preference, now they have to choose between taking their 1x liquidation preference or converting their shares into common stock (i.e. stock with the same rights as the stock owned by founders and employees).
Meanwhile, the single trigger vesting provision means that investors can no longer force founders to keep working in the company even after the company is sold. Double-trigger acceleration, on the hand, typically requires a sale followed by a firing without cause to let founders leave rather than continuing with the company post-sale.
Ultimately, using the template promises to save both founders and investors substantial legal fees, since there won’t be so much haggling over legal terms. Michael Arrington reckons the average spend per venture capital round is $50k; I’ve personally worked on deals as a lawyer where the fees were upward of that. In fact, I recall one venture capital deal where the fees tipped over AUD $100k before the deal was called off!
Of course, using a template agreement that the VC won’t agree with won’t save a dime. Both the founders and the VCs have to commit to this (or any other standard term sheet) for the concept to work. Still making a template agreement publicly available should save money in establishing the framework for each party to use.
Here’s the template (keep in mind that it’s U.S. centric and may not be suitable for deals conducted in other jurisdictions): Plain Preferred Term Sheet
Source: Michael Arrington, “The Funded Publishes Ideal First Round Term Sheet,” TechCrunch, August 23, 2009
