term-sheet

TheFunded, a site that gives entrepreneurs a way to rate venture capitalists, continues to roll out services to help entrepreneurs in other ways. Today, TheFunded’s Founder Institute published a template document for entrepreneurs to use when they’re raising money.

Called the “Plain Preferred Term Sheet,” the document (embedded below) was inspired by a recent debate sparked by entrepreneur Chris Dixon (co-founder of Hunch) and investor Fred Wilson, who have been seeking a way to simplify the complicated provisions that have crept into the average term sheet. The term sheet, as its name suggests, is the document that contains all of the terms that govern an investment by a venture capitalist in a company.

TheFunded paid Silicon Valley’s top law firm Wilson Sonsini to author a template agreed to by those arguing for simplicity.

TheFunded founder Adeo Ressi says the document compliments the founder-friendly incorporation documents already developed by the Institute, which he said are used by almost 50 start-ups both within and outside of the Institute.

Here are the significant changes being proposed:

  • The elimination of participation — “Participation” lets investors “double dip” by getting both their liquidation preference (in other words, when a company is sold or goes public, they get the money that they invested back before the founders or other employees see their first dime) and their equity allocation.
  • A 1x liquidation preference — The liquidation preference has ranged from 1x to 3x in recent deals, according to TheFunded.com. A “1x liquidation” preference without participation means that investors choose to either (a) get 1 times their money back or (b) convert to equity and get the equity value only. This is a downside protection term.
  • Single trigger vesting — This allows founders to vest all of their equity and make money in an exit. Many investors require “double trigger vesting,” which means that the company needs to sell and the founder needs to be terminated for his or her shares to vest.

Also worth reading is the piece we just published by Wilson Sonsini lawyer Caine Moss about how the seed round has become the new Series A.

Finally, this isn’t the first push for simplicity in term sheets. Ted Wang, of Fenwick & West, argued something similar two years ago, in his piece on Reinventing the Series A.

http://viewer.docstoc.com/
FFI Plain Preferred Term Sheet -