Meaning
Financing proposals from venture capitalists contain specific clauses that dictate the governance and economic terms of a proposed investment. These investor term sheet conditions outline the rights, preferences, and protections that the incoming investors expect in exchange for their capital. While many of these provisions are non binding, they establish the framework for the definitive legal agreements that will govern the relationship between the founders and the investors.
Economic Clause
Economic provisions focus on the division of proceeds during a liquidity event. These investor term sheet conditions typically specify the liquidation preference, the valuation of the company, and the size of the option pool that must be created before the investment. The configuration of these clauses directly determines the financial return that founders and employees will receive upon a successful exit.
Governance Term
Control provisions determine who makes the major decisions, often by specifying the composition of the board of directors and listing actions that require investor approval.
Exclusivity Agreement
A binding clause usually prevents the startup from seeking other funding sources during negotiations. This period of exclusivity allows the investor to conduct due diligence without the risk of being outbid by another party. If the startup breaches this condition, it faces legal and reputational consequences that can jeopardize its survival.
