General offer terms
Valuation
Headline valuation is perhaps the most visible component of any term sheet, but the largest number does not necessarily mean the best deal. There are a number of other components that will impinge on this in many different ways. It is critical you take a holistic view.Fully diluted
Share options
One common approach at Series A is to require companies to expand their share option pool as part of the round. New authorised share options will generally be counted in an “unallocated” pool and the board given the authority to allot them to new hires. Whilst this is usually a sensible move given the likely need to hire and incentivise new talent post raise, expanding the share option pool prior to the round will dilute only the existing investors, with full benefit to the new investors. The effect will be to reduce the share price paid on a “fully diluted” basis by the new investors at any given valuation, who will therefore receive more shares for a given investment amount.Conditions
Investors will attach various conditions to a term sheet, to the extent that there is in fact no contractual commitment to funding the business. These conditions will often relate to satisfactory legal documentation, due diligence, “Warranties” (see later), approvals (of investor and other investors as necessary), no material adverse change in the circumstances of the company, and service contracts for executive employees to name but a few. It is important to remember therefore that a term sheet is not a commitment, but an expression of intent, and companies should maintain all momentum until the deal is closed.Keep reading to find out how share terms factor in as you begin your fundraising journey.
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