Term Sheet

To begin with, it’s essential to understand that term sheets are non-binding documents. They outline the terms of an agreement between parties and serve as a summary for more detailed documents such as Articles of Association and Shareholder Agreements. Knowing how to negotiate these effectively can either save time or derail deals.

Preemption Rights

Most shareholders in early-stage UK companies have preemption rights. These rights protect existing shareholders from dilution when new funding rounds occur, allowing them the first opportunity to purchase additional shares before the company seeks outside investors.

Investor Consent

When participating in a Business Angel or VC funding round, expect investor consent to be a standard requirement. Founders typically hold a majority stake, but after investing, investors want to ensure that the founder doesn’t make poor decisions that could jeopardize their investment. Investor consent usually encompasses major decisions regarding salaries, debts, and more.

Board Positions

This topic deserves its own discussion due to its complexity. Over the past 14 months, I’ve seen an increasing demand from investors for either board positions or observer roles. Startups at this stage often end up with large boards, which can complicate governance.

Board Approval

Board approval serves as an additional layer to investor consent. In many scenarios, investor consent can override board decisions. While the CEO manages daily operations, the board ensures governance aligns with shareholder interests.

Liquidation Preferences

Sometimes referred to as a ratchet, liquidation preferences dictate the order of payouts in the event of a sale or winding-up order. VCs often prefer to recoup their investments before other shareholders, but it’s crucial to negotiate these terms carefully, as they can limit returns for friends and family involved.

Warranty Liability Cap

Warranties are assurances made by founders about their business. While many are transparent, some may not be, especially during the Seed stage. A liability cap defines the maximum amount a founder is responsible for if discrepancies arise post-investment.

Warranty Liability Floor

Contrasting with the cap, a liability floor is the minimum threshold for shareholders to pursue claims against the company. For instance, if a shareholder wanted to address a £10k issue and the floor was set at £15k, they would not be able to take action.

Hockey Stick Growth

VCs generally expect to see a “hockey stick” growth curve, which indicates a doubling of sales year-over-year. Attempting to quadruple growth in a single year is often unrealistic.

Market Penetration

This term refers to the proportion of the total market that a startup aims to capture within a specified timeframe.

Runway

Runway indicates how long the funds raised will last. Be precise, as potential investors will likely ask how this timeline shifts if challenges arise.

ARR/MRR

Annual Recurring Revenue (ARR) represents the consistent income a business generates each year, while Monthly Recurring Revenue (MRR) is the annualized equivalent.

Burn Rate

This term measures how quickly a company is spending its cash reserves to cover expenses, usually expressed on a monthly or weekly basis. It’s relevant for startups with minimal or no revenue.

Convertible Note

A convertible note is a form of short-term debt that can convert into equity. In seed financing, this typically means the debt converts into shares of preferred stock upon closing a Series A round. Essentially, investors provide initial funding in exchange for equity rather than interest.

Customer Acquisition Cost

This key metric in unit economics tracks how much it costs to attract a new customer. It’s calculated by dividing direct acquisition costs (mainly marketing and sales) by the number of new customers acquired.

Data Room

A data room, or virtual data room, is an online repository for storing and sharing documents, typically used during due diligence in funding rounds.

Unit Economics

Unit economics are critical for evaluating a product or service's profitability. This is often summarized as the Lifetime Value (LTV) of a customer divided by the Customer Acquisition Cost (CAC).

Anti-Dilution Clause

This contractual clause safeguards investors from significant reductions in their ownership percentage during future fundraising.

Down Round

A down round occurs when a startup is valued lower per share compared to previous rounds, indicating a decline in valuation.

Drag-Along Rights

These rights allow a specified percentage of shareholders to compel others to sell their shares or approve a company sale, preventing minority shareholders from obstructing these actions.

If you’re interested in discussing opportunities or seeking assistance, please feel free to connect with me on LinkedIn or reach out to Pario Ventures or The Grumpy Entrepreneur.

David Murray-Hundley is the CEO of Pario Ventures, operating out of New York and London.