Down Round Term Sheet
What is this form?
The Down Round Term Sheet is a specific type of legal document used in corporate financing that outlines the essential terms of an investment round where the valuation of a company has decreased. Unlike a standard term sheet, this document focuses on the nuances of raising capital in a down round scenario, including terms related to preferred stock and investor rights.
Form components explained
- Details of the corporation, including its name and type.
- Amount of investment and the security type, specifying convertible preferred stock.
- Terms relating to valuation, price per share, and use of proceeds.
- Provisions regarding dividends, preference, and participation rights for preferred stockholders.
- Investor rights and governance structure including board composition and voting rights.
- Conditions for conversion, anti-dilution provisions, and redemption rights.
Situations where this form applies
This form is essential when a company is raising funds through a down round of financing, meaning the investment is being made at a valuation lower than previous rounds. It is used to outline the rights and protections for investors during such financial arrangements and to clarify the impact on existing shareholders.
Who can use this document
This form is intended for:
- Corporations seeking to raise capital in a down round.
- Investors looking to understand their rights and obligations in a down-round investment.
- Counsel and financial advisors assisting companies or investors during financing discussions.
How to complete this form
- Identify the parties involved in the investment, including the corporation and the investors.
- Fill in relevant details such as the investment amount, security type, and pre-money valuation.
- Specify the rights and preferences of the preferred stockholders regarding dividends and liquidation preferences.
- Outline board composition and the process for voting rights among shareholders.
- Finalize terms regarding conversion rights, anti-dilution provisions, and redemption conditions.
Does this form need to be notarized?
This form usually doesn’t need to be notarized. However, local laws or specific transactions may require it. Our online notarization service, powered by Notarize, lets you complete it remotely through a secure video session, available 24/7.
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Make edits, fill in missing information, and update formatting in US Legal Forms—just like you would in MS Word.
Download a copy, print it, send it by email, or mail it via USPS—whatever works best for your next step.
Sign and collect signatures with our SignNow integration. Send to multiple recipients, set reminders, and more. Go Premium to unlock E-Sign.
If this form requires notarization, complete it online through a secure video call—no need to meet a notary in person or wait for an appointment.
We protect your documents and personal data by following strict security and privacy standards.
Avoid these common issues
- Failing to specify accurate valuation metrics, which can lead to confusion among stakeholders.
- Neglecting to clearly outline the rights of each class of stock, resulting in disputes later on.
- Omitting required signatures or approval processes, which may invalidate the term sheet.
Benefits of completing this form online
- Quick access to a professionally drafted term sheet tailored for specific needs.
- Easy editing capabilities to customize terms to suit particular financing scenarios.
- Reliability from using forms drafted by licensed attorneys, ensuring legal compliance.
Legal use & context
- The Down Round Term Sheet serves as a binding expression of intentions regarding investment terms.
- It is essential for protecting the rights of investors during financial downturns.
- Proper use of the form can help establish enforceable agreements and reduce potential conflicts.
Key takeaways
- The Down Round Term Sheet outlines critical terms for financing in a down round scenario.
- Understanding key components is essential for both corporations and investors.
- Proper completion of the form can help prevent future disputes and ensure clarity in investment agreements.
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FAQ
A down round refers to a private company offering additional shares for sale at a lower price than had been sold for in the previous financing round. Simply put, more capital is needed and the company discovers that its valuation is lower than it was prior to the previous round of financing.
A down round refers to a private company offering additional shares for sale at a lower price than had been sold for in the previous financing round. Simply put, more capital is needed and the company discovers that its valuation is lower than it was prior to the previous round of financing.
The best way to avoid down rounds is to be prudent and strategic when raising funds. As Y Combinator points out, the temptation to raise as much money as you can is very strong for startups, particularly as large valuations and capital raises are celebrated as markers of success.
A term sheet is a nonbinding agreement outlining the basic terms and conditions under which an investment will be made. Term sheets are most often associated with startups. Entrepreneurs find that this document is crucial to attracting investors, such as venture capitalists (VC) with capital to fund enterprises.
Take the Time to Woo Multiple Investors. Do Your Due Diligence When Finding Investors. Negotiate A Term Sheet Better by Understanding the Terminology. Hire a Good Lawyer to Assist You. Prioritize the Non-Negotiables of Your Term Sheet. Be Prepared to Negotiate with Your Investor. Watch for Red Flags.
A term sheet is a bullet-point document outlining the material terms and conditions of a potential business agreement, establishing the basis for future negotiations between a seller and buyer. It is usually the first documented evidence of possible acquisition. It may be either binding or non-binding.
Get more than one VC interested. The key to negotiating VCs is to have more than one show interest. Understand typical market terms. Valuation is key. Confirm the VC's interest. Retain a lawyer with VC financing expertise. Take the reins. Prioritize your non-negotiables. Understand dilution.
Term sheets evidence serious intent, but generally are not legally binding.Although the term sheet itself is not typically legally binding, some term sheets contain certain legally binding provisions (for example, confidentiality or exclusivity).
How much money is expected from the VC, or venture capitalist, to the founder of the startup, A detailed overview of the financial side of the investment, and. The power and controls given to the VCs.
