Question

True/False for the following:

1) It is standard practice for a term sheet to require more than half the board seats to go to the seed investors.

2) The term sheet between an investors and founder is a legally binding agreement.

3) If a 1X liquidation preference is included in the term sheet the Venture Capitalist will never be able to realize a gain on its investment but will be protected from a loss.

4) An option pool is used by founders to make payments to employees. The options grant the employees the right but not the obligation to buy shares of the companies shares at a set price before they expire. Using options conserves cash and ties the employee to the long-term success of the venture.

5) A term sheet will address what happens to the shares of founders should founders decide to leave the company.

Answer 1

1. True – for a seed stage investing, more than half of the board members is sufficient. For example, if there are 5 members in a board, then a majority of at least 3 members approval is required for going to seed investors.
2. False – it is only a non binding agreement unless the parties namely the investors and founders have reached a preliminary level of comfort with each other. The signing of agreement takes place only when binding obligation is formally created.
3. True – this is because when 1 x liquidation is included in the term sheet, for example if the investor has invested $1 million, it ensures that the $1 million is paid back before the common shareholders are paid anything. The entrepreneur would always prefer the least possible multiple so that only least proceeds can be paid to the investor.
4. True – this is because the two major purposes of option pool is to pay the people with currency other than cash and the second purpose is to make the venture succeed.
5. True – the term sheet will speak about the vesting of founder’s shares. It says that if a particular founder is vacated from the position, how the unvested shares can be allocated to the new hire.