Securing funding is a monumental step, and with it comes a crucial phase: understanding and negotiating term sheets and investor agreements. These documents are the legal bedrock of your investment, outlining the rights, responsibilities, and expectations of both your startup and your investors. While they can seem daunting, a solid grasp of their key components will empower you to make informed decisions and protect your company's future.
The term sheet is typically the first legally binding document you'll receive from an investor. It's a non-binding (mostly) outline of the key terms of the investment. Think of it as a handshake agreement on paper, setting the stage for the more detailed investor agreements that follow. It's vital to have a legal professional review this document, even at this early stage.
Key elements you'll find in a typical SaaS startup term sheet include:
graph TD; A[Term Sheet Elements] --> B(Valuation); A --> C(Investment Amount); A --> D(Investor Rights); A --> E(Liquidation Preferences); A --> F(Board Seats); A --> G(Option Pool); A --> H(Protective Provisions)
Valuation: This is the agreed-upon worth of your company before the investment. It's often expressed as pre-money valuation (your company's worth before funding) and post-money valuation (pre-money valuation + investment amount). A higher valuation means investors get a smaller percentage of your company for their money.
Investment Amount: This is straightforward – the total sum of money the investor(s) are committing to invest in your company.
Investor Rights: These can include a variety of protections and privileges for investors, such as information rights (access to company financials), pro-rata rights (the right to maintain their ownership percentage in future funding rounds), and rights of first refusal (the first opportunity to buy shares if an existing shareholder wants to sell).
Liquidation Preferences: This is a critical clause that dictates how proceeds are distributed in the event of a sale or liquidation of the company. Common types include: