Example Term Sheet for Startup Investment

Company Name: XYZ Technologies, Inc.
Investor: Venture Capital Firm ABC
Date: [Insert Date]

1. Investment Terms

Investment Amount:
$2,000,000

Pre-Money Valuation:
$8,000,000

Post-Money Valuation:
$10,000,000

Type of Security:
Series A Preferred Stock

Shares Issued:
200,000 shares of Series A Preferred Stock

2. Capitalization

Pre-Investment Capitalization:

  • Founders: 500,000 shares (50%)

  • Seed Investors: 300,000 shares (30%)

  • Employee Stock Option Pool: 200,000 shares (20%)

Post-Investment Capitalization:

  • Founders: 500,000 shares (40%)

  • Seed Investors: 300,000 shares (24%)

  • Employee Stock Option Pool: 200,000 shares (16%)

  • Series A Investors: 200,000 shares (20%)

3. Governance and Control

Board Composition:

  • 2 seats for Founders

  • 1 seat for Seed Investors

  • 2 seats for Series A Investors

  • 1 Independent Seat (to be mutually agreed upon)

Voting Rights:
Series A Preferred Stockholders will have the same voting rights as common stockholders on an as-converted basis, with the following special voting rights:

  • Approval required for any amendments to the Articles of Incorporation that adversely affect Series A Preferred Stock.

  • Approval required for any merger or sale of the company.

4. Liquidation Preferences

Preference:
Series A Preferred Stockholders will receive a liquidation preference equal to 1x the original purchase price ($2,000,000) plus any declared but unpaid dividends before any distribution to common stockholders.

Participation:
After receiving their liquidation preference, Series A Preferred Stockholders will participate with common stockholders on an as-converted basis.

5. Anti-Dilution Provisions

Weighted Average:
The Series A Preferred Stock will be protected by a weighted average anti-dilution provision.

6. Dividends

Non-Cumulative:
Dividends on the Series A Preferred Stock will be non-cumulative and will be payable when, as, and if declared by the Board of Directors.

7. Conversion Rights

Optional Conversion:
Series A Preferred Stock may be converted into common stock at the option of the holder at any time.

Mandatory Conversion:
Series A Preferred Stock will automatically convert into common stock upon the closing of a firmly underwritten public offering with proceeds of at least $50,000,000 or upon the consent of the majority of the Series A Preferred Stockholders.

8. Exit Strategy Provisions

Right of First Refusal:
Investors will have the right of first refusal to purchase shares proposed to be sold by any founder.

Drag-Along Rights:
If the majority of Series A Preferred Stockholders approve a sale of the company, all other stockholders are obligated to sell their shares on the same terms.

9. Employee Stock Options

Option Pool:
The employee stock option pool will be increased to represent 20% of the post-money capitalization.

10. Additional Provisions

Information Rights:
Series A Preferred Stockholders will have standard information and inspection rights, including quarterly and annual financial statements.

Founder Vesting:
Founders' remaining shares will be subject to a 4-year vesting schedule, with a one-year cliff and monthly vesting thereafter.

Protective Provisions:
Consent of the majority of Series A Preferred Stockholders will be required for:

  • Any new issuance of equity securities.

  • Any incurrence of debt above $500,000.

  • Any material change in the company's business plan.

Conclusion

This term sheet serves as a summary of the key terms and conditions of the proposed investment in XYZ Technologies, Inc. It is intended to provide a basis for negotiating the final legal documents and is not legally binding, except for the confidentiality and exclusivity provisions.

Confidentiality: The contents of this term sheet are confidential and intended for use only by the parties involved.
Exclusivity: The company agrees not to seek or negotiate investment from other parties for a period of 60 days from the date of this term sheet.

Accepted and Agreed:

XYZ Technologies, Inc.
By: ____________________________
Name: [Founder’s Name]
Title: [Founder’s Title]

Venture Capital Firm ABC
By: ____________________________
Name: [Investor’s Name]
Title: [Investor’s Title]