Finding a potential investor for your startup can be exciting. It could mean having the funds to expand your company’s growth and learning from an established veteran in the business. However, it’s crucial to scrutinize a term sheet carefully before signing it. Although term sheets are not legally binding, withdrawing agreed-upon terms could hurt your relationship with the potential investor.
Valuation
Your company’s valuation can impact your fundraising efforts. A high valuation could mean that the investor sees a lot of potential in your business, which may allow you to raise more capital and attract other investors. However, a high valuation can also lead to unrealistic expectations.
There may also be a chance that you and the investor do not see eye to eye on your company’s valuation. If the gap is too large, you may expect disagreements and conflicts down the line.
Anti-dilution protection
Anti-dilution protection allows investors to protect their ownership stake in the event of a down round or when the company raises money at a lower valuation than the previous round. However, this safeguard could hurt you as the founder by causing you to lose a significant stake in your company. Ideally, you should review the clause and negotiate conditions that are fair to all parties.
Covenants
Essentially, a covenant is a promise that you or your investor puts in writing. It can include everything from noncompete provisions to meeting performance targets. Breaking a covenant can have serious legal consequences. When starting a company, it’s important to avoid making commitments that you can’t keep.
Investors may include many other provisions in term sheets, some of which may appear fair at first glance but turn out to be less than ideal in practice. Before you sign, it’s important to do your homework. Consulting a lawyer is one way to achieve this. They have the experience to recognize unreasonable terms and negotiate a better deal for you.
