Securing angel investment can be a challenging process for startups and entrepreneurs. Having a simple term sheet template is crucial to outline the key terms and conditions of the deal for both parties. This helps set clear expectations and avoid misunderstandings down the road. In this article, we will dive into the core components of a simple term sheet for angel investment and provide a downloadable template. Properly structuring the investment terms early on lays a solid foundation for the startup-investor relationship. We will also explore common negotiating points from both perspectives when finalizing the term sheet. For entrepreneurs seeking pre-seed or seed funding, having a mutually beneficial term sheet is key to sealing the deal with angel investors and starting off on the right foot.
Essential Sections of a Simple Angel Investment Term Sheet
The term sheet template should cover several key sections in a condensed format, including:
Investment Amount & Valuation: This specifies the amount being invested and the pre-money valuation or share price. It sets expectations for the ownership percentage the angels will receive.
Capital Structure: This outlines the current capitalization table and may indicate any major changes planned upon closing of the financing.
Liquidation Preference: This indicates the payout order and multiples in case of an exit or liquidation event. 1x liquidation preference is standard for angel deals.
Conversion Terms: Details the terms by which the preferred shares convert into common shares, such as automatically upon IPO or future equity financing.
Governance: Board seats, voting rights, and protective provisions granted to the investor. Board observer rights are common.
Future Rights: Outlines the pro rata rights, information rights, and other rights granted to the investor for future financing rounds.
Restrictions on Stock: Indicates any transfer restrictions, rights of first refusal, or co-sale agreements on the stock.
Vesting: Founder and employee stock vesting schedule, if any.
Other Terms: Other key points like exclusivity period, legal fees, confidentiality, and binding clauses.
Key Negotiation Points in an Angel Investment Term Sheet
While the term sheet provides a framework for the investment, there are several areas that often involve back-and-forth negotiations between the entrepreneur and angel investor:
Valuation: This is often a delicate balancing act. Entrepreneurs want a high valuation while angels aim for a lower valuation to maximize their ownership stake. Market comps can guide reasonable valuations.
Liquidation Preference: Angels may ask for a higher multiple (2-3x) while entrepreneurs push for 1x preference. Compromise at 1.5-2x is common.
Future Rights: Angels want extensive future rights to invest in subsequent rounds. Entrepreneurs may seek to limit these rights after the first 1-2 rounds.
Board Seats: Angels often want a board seat and even veto rights. Entrepreneurs may push back to maintain control. An independent board seat is ideal for angels.
Vesting: Angels generally want a 4-year vesting schedule for founder shares. Entrepreneurs may argue for less vesting or immediate full vesting.
The goal is finding mutually agreeable terms that provide the investor protections they seek while allowing the entrepreneur to maintain adequate control and flexibility.
Downloadable Simple Term Sheet Template
Here is a link to download a simple, customizable term sheet template for angel investments: [LINK TO TERM SHEET TEMPLATE DOWNLOAD]
This covers all the key sections needed in a condensed 1-2 page format. Entrepreneurs can use this template as a starting point and tailor it to their specific situation and needs. It allows them to efficiently present proposed investment terms to angels to kickstart the negotiations.
Having a comprehensive term sheet in place early in discussions helps set clear expectations and gets the relationship off on the right foot. Both parties know what is expected in terms of economics, control, governance, and protections. This template enables entrepreneurs and angels align on fair terms so they can focus on the exciting journey of scaling the business together!
A simple term sheet template is essential for entrepreneurs seeking angel investment funding for their startup. Outlining proposed terms early on sets clear expectations and boundaries for the deal. While negotiation is expected on certain points like valuation and governance, the term sheet creates a solid framework for the investment relationship. Using a downloadable template helps entrepreneurs efficiently structure and present a professional term sheet that covers all the key sections angels will expect to see. This increases the chances of successfully securing angel investment on mutually beneficial terms.