A term sheet is one of the first and most important documents you’ll create when raising funds for your Web3 startup. But what exactly goes into a term sheet, and how can you make sure you’re covering all the essentials? Don’t worry—we’re here to break it down for you in just five simple steps!
Start by outlining the basic information about your deal. This includes your company’s name, the amount you’re raising, and the mode of investment you are offering (for instance: equity, SAFE, SAFE + TW or SAFT). Make sure to clearly state whether the investment involves tokens, shares, or both, and be sure to consider the various implications of each mode of investment (for example, fundraising through the sale of tokens should be avoided in certain jurisdictions).
Pro Tip: If you’re unsure about the type of investment you want to offer, GVRN can help you tailor a structure that suits your project’s specific needs. Contact the GVRN team now.
The valuation (valuation cap in the context of SAFEs, and FDV in the context of SAFTs) is crucial for determining how much equity and/or token ownership investors will receive in return for their investment. In simple terms, it's the maximum value of your company at which an investor can convert their investment into equity or tokens. Think of it as laying the foundation of your project’s worth (whether in the form of the company’s shares, or tokens).
Now, outline what rights investors will have. This may include voting rights, board seats, and access to financial information. These should be adjusted according to the round of the fundraising stage that you are presently in. Clearly defining these rights will help set expectations and minimize possible misunderstandings later down the road.
Specify any milestones or vesting schedules related to the investment. For example, if tokens are involved, you might outline how and when they will be distributed. Adding a vesting schedule provides clarity and certainty to the investor which helps build investor trust.
Once all the key elements are in place, review the term sheet carefully. Make sure both parties agree on every detail (for example, is there an exclusivity or “no-shop” period? How long do the parties have to agree on the definitive agreement after the term sheet is settled?).
At this point, you may also want to consult legal advisors to ensure everything is in order.
Understanding the Legal Jargon:
Valuation:
The maximum company valuation at which an investor’s funds can convert into equity or tokens.
Vesting Schedule:
A timeline or schedule that dictates when an investor or team member is deemed to be entitled to their tokens / shares, and when they receive their tokens or shares and the proportion of shares they will receive.
Investor Rights:
Rights granted to investors, such as voting power, access to company information, or even a board seat.
Drafting a term sheet doesn't have to be a daunting task. By following these five simple steps, you can create a document that clearly outlines the terms of your deal and primes your Web3 startup for successful fundraising.
Ready to create your term sheet without the hassle? Try GVRN’s free term sheet generator and get started in minutes!
