Equity crowdfunding can seem like the miracle a business needs to get a good idea off of the ground. For the average small business owner, however, there are components to equity crowdfunding that can end up being extremely confusing. Top on the list of questions that people tend to have involves the term sheet.
What is the term sheet? It’s a document that is required because it outlines the terms of how an investor can actually make an investment into a business. It is required for equity crowdfunding because the investment that is made will provide that person with a percentage of the equity that your business has.
Sections of a Term Sheet
The typical term sheet will consist of three different sections:
1. Funding: In this section, the term sheet will explicitly state the expectations of an investment and what it will be used for within the business. It will inform the investor of the proposed valuation of the business and the expected equity that will be given in return for the investment.
2. Corporate Governance: You will have an extensive section that will govern the terms of the business, how investors can get involved, and what the certain rights an investor may have. This could include how directors are elected, how sales are transacted, or even how to sell shares to a third party.
3. Liquidation: This section will direct what the liquidation preferences will be for shareholders and will list the differences available between common shares and preferred shares. It will describe conversions, automatic conversions, and what voting rights are available to the shareholders from the equity crowdfunding campaign.
Without these term sheets, it is impossible for an investor to get a true picture of your business. It is a unique entity and an investor wants to know what makes you unique. What makes you unique is what makes you an exciting investment opportunity.
Term Sheets Are Not Something You Can Print From a Template
Although there are a number of high quality examples of term sheets available on the internet today, it is important to realize that you can’t put your business details into someone’s previous term sheets. This document provides the long-term implications of an investment into YOUR Company and so it must be directly reflective of what your plans are, what your proven evaluation happens to be, and how an investor can operate once an investment has been made.
You’ll need to consult with a local legal professional in order to make sure your term sheets reflect the financial offering you want. This will protect your business and your investors by eliminating the subjective nature of an undefined definition.
Keep in mind that this article is not offering legal advice in any way. It is simply an encouragement for first time small business professionals to take into account everything that is needed for an equity crowdfunding campaign. Work hard on your term sheets, have them looked at by a lawyer, and then you’ll be ready to raise some funding.
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