Term sheets are very similar to "letters of intent" (LOI) in that they are both preliminary, mostly non-binding documents meant to record two or more parties' intentions to enter into a future agreement based on specified (but incomplete or preliminary) terms. The difference between the two is slight and mostly a matter of style: an LOI is typically written in letter form and focuses on the parties' intentions; a term sheet skips most of the formalities and lists deal terms in bullet-point or similar format. There is an implication that an LOI only refers to the final form. A term sheet may be a proposal, not an agreed-to document.
Term sheet for friends and family round is a crucial document that outlines the key terms and conditions of an investment agreement between entrepreneurs and their close network of friends and family members. This type of funding round is typically conducted in the early stages of a startup's development. The term sheet serves as a blueprint for the investment deal and provides clarity and legal protection for all parties involved. It contains various important facets which include: 1. Investment Amount: The total amount of capital that friends and family members are willing to invest in the startup. 2. Valuation: The pre-money valuation of the startup, which determines the ownership stake the investors will receive in exchange for their invested capital. 3. Equity Distribution: Specifies the equity stake each investor will receive, usually expressed as a percentage of the total shares outstanding. 4. Liquidation Preference: Outlines the order in which investors will be repaid in the event of a liquidation or exit, ensuring that they receive their initial investment back before others. 5. Dividends: Specifies whether investors will receive any dividends and if yes, the rate or percentage at which they will be paid. 6. Anti-Dilution Protection: Provides safeguards for investors in case future funding rounds are conducted at a lower valuation, ensuring their ownership stake isn't diluted excessively. 7. Board of Directors: Defines if investors will have the right to appoint members to the startup's board of directors, giving them influence and decision-making power. 8. Vesting: Specifies the vesting schedule for founders and key team members to ensure their commitment to the startup over a certain period. Different types of term sheets may exist within the friends and family round based on the specific requirements and preferences of the parties involved. Some variations could include: 1. Simple Term Sheet: A basic document outlining only the fundamental terms and conditions, suitable for informal investment agreements among close friends and family members. 2. Convertible Note Term Sheet: If the friends and family investors prefer to provide a loan rather than acquiring equity, a convertible note term sheet outlines the terms for converting the debt into equity at a later funding stage. 3. SAFE (Simple Agreement for Future Equity) Term Sheet: Similar to a convertible note, a SAFE term sheet establishes an agreement for the purchase of future equity but without accruing debt. In conclusion, a term sheet for friends and family round is a pivotal document that formalizes the investment agreement between entrepreneurs and their close network. It solidifies the foundation of the investment, outlines key terms and conditions, and protects the interests of all parties involved.
